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Registration No. _________ |
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As filed with the Securities and Exchange Commission on September 29, 2004. |
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT
Under
THE
SECURITIES ACT OF 1933
SMART
ONLINE, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 7372 | 95-4439334 |
| (State of Incorporation) |
(Primary Standard
Classification Code No.) |
(I.R.S. Employer
Identification No.) |
Copies of all communications, including all communications sent to the agent for service, should be sent to:
James F. Verdonik, Esq.
Daniels Daniels & Verdonik, P.A.
P.O. Drawer 12218
Research Triangle Park, NC 27709
(919) 544-5444
(919) 544-5920 (fax)
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of the registration statement until such time that all of the shares of common stock being offered hereunder have been sold.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If the Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
CALCULATION OF REGISTRATION FEE
|
TITLE OF
EACH CLASS OF
SECURITIES TO BE REGISTERED |
AMOUNT TO
BE
REGISTERED (1) |
PROPOSED
MAXIMUM OFFERING PRICE PER SHARE (2) |
PROPOSED
MAXIMUM AGGREGATE OFFERING PRICE (2) |
AMOUNT OF
REGISTRATION FEE |
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Common stock, par value $0.001
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1,699,993 | $ 5.00 | $ 8,499,965 | $ 1,076.95 |
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TOTAL |
1,699,993 | $ 8,499,965 | $ 1,076.95 |
| (1) | Includes (i) up to 1,260,569 shares of common stock issued in a private placement conducted from March 2004 through September 27, 2004 and up to 58,226 shares of common stock issued pursuant to registration rights agreements signed in connection with the private placement; (ii) up to 281,138 shares of common stock currently issuable upon exercise of warrants issued in a private placement conducted from March 2004 through June 2004; (iii) 100,000 shares of common stock issued in exchange for a warrant issued in 2001; and (iv) any additional shares of common stock which may become issuable upon exercise of the common stock purchase warrants by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of common stock. |
| (2) | Estimated solely for the purpose of computing the registration fee required by Section 6(b) of the Securities Act of 1933, as amended (the "Securities Act") and computed pursuant to Rule 457 based upon a sale price of $5.00 per share by the Company of its Common Stock, which was the last sale prior to filing this registration statement. It is not known how many shares will be purchased under this registration statement or at what price shares will be purchased. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Subject to completion, dated ______________, 2004
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The information in this prospectus is not complete and may be changed. The selling security holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and the selling security holders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. |
PROSPECTUS
SMART
ONLINE, INC.
1,699,993 SHARES OF COMMON STOCK
Smart Online, Inc., a Delaware corporation (" Smart Online "), of 1,699,993 shares of our common stock, par value $0.001 per share.
This prospectus covers up to 1,699,993 shares of Smart Online's common stock that may be offered for resale by the security holders named in this prospectus and the person(s) to whom such security holders may transfer their shares. The selling security holders named in this prospectus are offering all of the shares of common stock offered through this prospectus. No shares are being offered by Smart Online. The shares were acquired by the selling shareholders directly from us in private offerings that were exempt from registration under the United States securities laws.
We will not receive proceeds from the resale of the shares by selling security holders. We will bear substantially all expenses of registration of the shares. The selling security holders will pay any underwriting fees, discounts or commissions and transfer taxes in connection with the sale of the shares.
Our common stock is presently not traded on any market or securities exchange. It is our intention to have a market maker apply for trading for our common stock on the Over the Counter Bulletin Board ("OTC BB") following the effectiveness of this registration statement.
The shares of common stock may be sold from time to time by the selling security holders in one or more transactions at fixed prices, at market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The selling security holders and any broker-dealer who may participate in sales of the shares may use this prospectus. See "Plan of Distribution."
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 7.
We are located at 2530 Meridian Parkway, Durham, North Carolina 27713. Our telephone number is 919-765-5000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this prospectus is September __, 2004.
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Smart Online, Inc. (" Smart Online ") was incorporated under the laws of Delaware on August 10, 1993.
This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission utilizing a “shelf” registration process. Under this shelf process, the selling security holders may from time to time sell their shares of our common stock in one or more offerings. This prospectus provides you with a general description of the common stock being offered. You should read this prospectus, including any documents incorporated herein by reference, together with additional information described under the heading “Where You Can Find More Information.”
The registration statement that contains this prospectus, including the exhibits to the registration statement, contains additional information about us and the securities offered under this prospectus. That registration statement can be read at the Securities and Exchange Commission’s offices mentioned under the heading “Where You Can Find More Information.”
Company Overview
Smart Online develops and markets Internet-delivered Software-as-Services (SaS) software applications and data resources to start, run, protect and grow small businesses (one to fifty employees). We have many direct small business users through our portal at www.SmartOnline.com , and we reach many small businesses through private label syndication partnering agreements pursuant to which we offer our products on the web sites of major companies and financial institutions. Expanding this network of relationships with large companies is one of our key strategies to generate revenue while minimizing our marketing and sales expenses.
Smart Online has developed numerous sources of revenue as its business plan has changed to adapt to changing business circumstances. These sources of revenue include syndication partners, integration partners, OEMs, subscriptions from small businesses, one-time purchases by small businesses and barter transactions with media companies. Currently, each of these revenue streams is small. Our business plan is designed to utilize existing and future relationships in each revenue source to ratchet up the amount of revenue we derive from all sources. We have described below the key elements of how we plan to achieve this.
Our executive offices are located at 2530 Meridian Parkway, 2 nd Floor, Durham, North Carolina 27713, and our telephone number is (919) 765-5000.
Offering Summary
We are registering for resale by the selling security holders (i) up to 1,260,569 shares of common stock issued in a private placement in March 2004 through September 27, 2004 and up to 58,226 shares of common stock issued pursuant to registration rights agreements executed in connection with the private placement; (ii) up to 281,138 shares of common stock issuable upon the exercise of common stock purchase warrants of the Smart Online held by the selling security holders issued in the same private placement; and (iii) 100,000 shares of common stock issued in exchange for a warrant issued by Smart Online in 2001. In addition, we are also registering for resale any additional shares of common stock which may become issuable with respect to the shares of common stock or upon exercise of the common stock purchase warrants by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of common stock, and any shares of common stock which may become issuable by reason of antidilution provisions of the warrants.
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Securities Being
Offered |
Up to 1,699,993 shares of common stock |
| Offering Price | The selling security holders can sell our shares at prevailing market prices, if a public market develops for our common stock, or at privately negotiated prices. |
| Terms of the Offering | The selling security holders will determine when and how they will sell the common stock offered in this prospectus. Refer to "Plan of Distribution." |
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Securities Issued
and to be Issued |
11,629,372 shares of our common stock are issued and outstanding as of September 29, 2004. Options to issue 1,907,900 shares of our common stock and warrants to issue 631,138 shares of our common stock are also outstanding as of the date of this prospectus, subject to adjustment pursuant to antidilution provisions contained in the warrants. |
| Use of Proceeds | All of the common stock to be sold under this prospectus will be sold by existing shareholders and we will not receive any proceeds from the sale of the common stock by the selling security holders. If warrant holders exercise warrants without exercising the cashless exercise provision of the warrants, we would receive the amounts paid to exercise the warrants. |
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Factors That May Affect Financial Condition and Results of Operations
We operate in a dynamic and rapidly changing business environment that involves substantial risk and uncertainty. The following discussion addresses some of the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, readers should pay particular attention to the descriptions of risks and uncertainties described below and in other sections of this report and our other filings with the Securities and Exchange Commission.
We have organized these factors into the following categories below:
RISKS ASSOCIATED WITH OUR FINANCIAL CONDITION
(1) We Have Never Been Profitable.
We have lost an aggregate of $31.3 million since inception. During the six months ended June 30, 2004, we suffered a loss of approximately $1.2 million. We have funded our operating losses since inception through sales of equity securities and loans, which total $28.1 million since inception. We had nominal liquid and tangible assets. We have only limited revenue from operations with which to create operating capital.
(2) Our Independent Auditor Has Indicated That it has Substantial Doubts That Smart Online Can Continue as a Going Concern. Our Independent Auditors’ Opinion May Negatively Affect Our Ability to Raise Additional Funds, Among Other Things. If We Fail to Raise Sufficient Capital We Will Not Be Able to Implement Our Business Plan and You Will Lose Your Investment.BDO Seidman, LLP, our independent auditors, has expressed substantial doubt about our ability to continue as a going concern given our lack of operating history and revenues to date. This opinion could materially limit our ability to raise additional funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital, we will not be able to implement our business plan and you will lose your investment. You should consider our auditor’s comments when determining if an investment in Smart Online is suitable.
(3) We Will Require Additional Financing To Fund Our Operations Or Growth. Financing May Not be Available or May Harm Existing Stockholders.In the future, we will be required to seek additional financing to fund our operations or growth. Factors such as the commercial success of our existing services and products, the timing and success of any new services and products, the progress of our research and development efforts, our results of operations, the status of competitive services and products, and the timing and success of potential strategic alliances or potential opportunities to acquire technologies or assets may require us to seek additional funding sooner than we expect. We cannot assure you that such funding will be available on terms that are acceptable to us, or at all. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders would be reduced. In addition, such securities could have rights preferences and privileges senior to those of our current stockholders. If adequate funds were not available on acceptable terms, our ability to achieve or sustain positive cash flows, maintain current operations, fund any potential growth, take advantage of unanticipated opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited.
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(4) Obligations to Stockholders and Employees May Impede Financings or Reduce the Capital We Have Available to Grow Our Business.
At June 30, 2004, we owed $1,087,991 to four officers and related entities for accrued salaries, plus interest, that we have not paid. These officers have agreed not to demand payment until December 31, 2005. In addition, if we raise capital during calendar year 2004, we are required to pay certain holders of our common stock, in connection with their exchange of preferred stock for common stock, a percentage of net proceeds we raise from sales of securities during calendar year 2004. As of September 27, 2004, we had raised a total of approximately $4.6 million of net proceeds (including approximately $1.4 million raised subsequent to June 30, 2004) from sales of securities during the calendar year 2004 and we do not owe payments on account of sales of securities, because no amounts are due for the first $5 million of net proceeds we raise. We will not be required to pay anything for the next $400,000 of net proceeds from sales of securities. Thereafter, the percentage we will owe for future capital raised is as follows: 20% of the next $5 million of net proceeds raised, 30% of the following $5 million of net proceeds raised and 40% of the next $5 million of net proceeds raised. This obligation applies only to financings that occur on or before December 31, 2004. These obligations to officers and stockholders may make it difficult to raise capital or may reduce the capital we have available to grow our business.RISKS ASSOCIATED WITH OUR PRODUCTS AND OPERATIONS
(5) Many of our Current Users Do Not Pay For Our Products.We currently allow many users of our web-based products to access our products without charge. Convincing users to begin paying for our products may require us to add new products. There can be no assurance customers will pay for our new products.
(6) We Will Rely Heavily On Successful Development and Market Acceptance of Our Next Generation Platform, OneBiz Conductor SMSince 2000, we have generated substantially all of our revenues from our current Internet-based services, content and software applications. Internet-based products are growing in sophistication and customer expectations are rising as new products are introduced. Our future financial performance and revenue growth may depend upon the successful development, introduction, and customer acceptance of OneBiz Conductor SM , our next generation platform. Our business could be harmed if we fail to deliver the improved performance that customers want with respect to our current and future offerings. There can be no assurance that our next generation platform will achieve widespread market penetration or that we will derive significant revenues from sales of OneBiz Conductor SM .
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(7) We May Not Successfully Develop or Introduce Our Next Generation Product, OneBiz Conductor SM , and Other New Products or Enhancements to Existing Products.
Our future financial performance and revenue growth will depend, in part, upon the successful development, introduction, and customer acceptance of our next generation product, OneBiz Conductor SM . Thereafter other new products and enhanced versions of our web-native business applications will be critically important to our business. Our business could be harmed if we fail to deliver enhancements that customers desire to our current and future solutions. In the past, from time to time, we have experienced delays in the planned release dates of our software and upgrades, and we have discovered software defects in new releases both before and after their introduction. New product versions or upgrades may not be released according to schedule, or may contain certain defects when released. Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our services and products, or customer claims against us, any of which could harm our business. If we do not deliver new product versions, upgrades, or other enhancements to existing services and products on a timely and cost-effective basis, our business will be harmed. We are also continually seeking to develop new offerings. However, we remain subject to all of the risks inherent in product development, including unanticipated technical or other development problems, which could result in material delays in product introduction and acceptance or significantly increased costs. There can be no assurance that we will be able to successfully develop new services or products, or to introduce in a timely manner and gain acceptance of such new services or products in the marketplace.
(8) Existing Factors May Delay or Prevent Development of Our Next Generation Platform, OneBiz Conductor SM .In addition to the factors that may delay or prevent completion of any new product development project, some existing factors may delay or prevent development of our next generation product, OneBiz Conductor SM . These factors include the following. OneBiz Conductor SM requires both enhancing our existing technology platform and adding many new software applications. Integrating so many new applications at the same time is difficult. Another factor that might delay or prevent development of OneBiz Conductor SM is that we have to hire, train and manage new development personnel to complete internal development on time. In addition, for many of the most important new applications of OneBiz Conductor SM , such as accounting and sales automation, we intend to rely on third party sources, whether through licensing, joint development or purchase. The willingness of third parties to enter into agreements with us and the ability of third parties to perform agreements are totally outside our control.
(9) Our Products Might Not Keep Pace with Technological Change.We must continually modify and enhance our services and products to keep pace with changes in hardware and software platforms, database technology, and electronic commerce technical standards. As a result, uncertainties related to the timing and nature of new product announcements or introductions, or modifications by vendors of operating systems, back-office applications, and browsers and other Internet-related applications, could harm our business.
(10) Our Business Is Difficult To Evaluate Because of Business Models and Operating Plans that Change As A Result of Forces Beyond Our Control.We incorporated in 1993 with a CD-ROM based business model. In 1999, we commercially introduced our Internet based Software as Service (SaS) business model when it became clear that customers would find the developing Internet world a better delivery platform. We began to enter into syndication partnering arrangements during year 2000 primarily as a result of the need to leverage the marketing and sales resources of others. Our business models and operating plans have evolved as a result of changes in our market, the expectations of customers and the behavior of competitors. Today, we anticipate that our future financial performance and revenue growth will depend, in large part, upon our Internet based SaS business model and syndication partnering arrangements, but these business models may again become ineffective due to forces beyond our control that we do not currently anticipate. Our evolving business model makes our business operations and prospects difficult to evaluate. Investors in our securities should consider all the risks and uncertainties that are commonly encountered by companies in this stage of business operations, particularly companies, such as ours, that are in emerging and rapidly evolving markets.
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Our future operating results will depend, in part, on our ability to manage changing business conditions, including such conditions as the general economic slowdown, reduced investment in information technology by customers and prospective customers, and reduced business travel and entertainment budgets. If we are unable to manage changing business conditions effectively, our business, financial condition, and results of operations could be materially and adversely affected. Failure to manage our operations with reduced staffing levels may strain our management, financial, and other resources, and could have a material adverse effect on our business, financial condition, and results of operations.
(12) The Success of Our Business Depends on The Continued Growth and Acceptance of the Internet as a Business Tool.Expansion in the sales of our service depends on the continued acceptance of the Internet as a communications and commerce platform for enterprises. The Internet could lose its viability as a business tool due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality-of-service. The performance of the Internet and its acceptance as a business tool has been harmed by “viruses,” “worms” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If for any reason the Internet does not remain a widespread communications medium and commercial platform, the demand for our service would be significantly reduced, which would harm our business.
(13) We Sell Third-Party Software and Web Services That May be Difficult to Replace.We rely on software licensed from third parties to offer some of our services and software offerings, including Merchant Services, Incorporation Services, on line direct mail Services and Loan Referrals. During 2002 approximately 17% of our revenue was derived from such third party software and services. During 2003 approximately 16% was derived from such sources. These software and services may not continue to be available on commercially reasonable terms, if at all. We plan to increase our reliance on third party software when we introduce OneBiz Conductor SM by licensing accounting and sales automation software from third parties. The loss or inability to maintain any of these arrangements could result in delays in the sale of our services or software offerings until equivalent technology or services are either developed by us, or, if available, are identified, licensed, and integrated. Any such delay could harm our business.
(14) If We Acquire Companies, Products, or Technologies, We May Face Risks Associated with Those Acquisitions. These Risks Include, But Are Not Limited to, Difficulty of Integrating, Dilution of Stockholder Value and Disruption of Our Business, Which Could Adversely Affect Our Operating Results.In the future, we plan to acquire products, or technologies. We may not realize the anticipated benefits of our prior or future acquisitions or investments to the extent that we anticipate, or at all. We may have to incur debt or issue equity securities to pay for future acquisitions or investments, the issuance of which could be dilutive to our existing stockholders. If any acquisition or investment is not perceived as improving our earnings per share, our stock price may decline. In addition, we may incur non-cash amortization charges from acquisitions, which could harm our operating results. Any completed acquisitions would also require significant integration efforts, diverting our attention from our business operations and strategy. We have made limited acquisitions to date, and therefore our ability as an organization to make acquisitions or investments is unproven. Acquisitions and investments involve numerous risks, including:
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In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions or investments, our business and prospects may be seriously harmed.
(15) We Rely on Third-Party Hardware and Software That May Be Difficult To Replace or Which Could Cause Errors or Failures of Our Service.We rely on hardware purchased or leased and software licensed from third parties in order to offer our service. This hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. Any errors or defects in third-party hardware or software could result in errors or a failure of our service, which could harm our business.
(16) Interruption Of Our Operations Could Significantly Harm Our Business.Significant portions of our operations depend on our ability to protect our computer equipment and the information stored in such equipment, our offices, and our hosting facilities against damage from fire, power loss, telecommunications failures, unauthorized intrusion, and other events. We backup software and related data files regularly and store the backup files at an off-site location. However, there can be no assurance that our disaster preparedness will eliminate the risk of extended interruption of our operations. In connection with our subscription services, we may engage third-party hosting facility providers to provide the hosting facilities and certain related infrastructure for such services. We also retain third-party telecommunications providers to provide Internet and direct telecommunications connections for our services. These providers may fail to perform their obligations adequately. Any damage or failure that interrupts our operations or destroys some or all of our data or the data of our customers, whether due to natural disaster or otherwise, could expose us to litigation, loss of customers, or other harm to our business.
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Because our service is complex, it may have errors or defects that users identify after they begin using it, which could harm our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service and new errors in our existing service may be detected in the future. Since our customers use our service for important aspects of their business, any errors, defects or other performance problems with our service could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales or customers may make warranty claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.
(18) Security and Other Concerns may Discourage Use of Our Internet Based Software as Services (SaS) Model.Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to one of our customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers. If customers determine that our services offerings do not provide adequate security for the dissemination of information over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use or if, for any other reason, customers fail to accept our products for use, our business will be harmed. As part of our operations, we receive credit card, employee, purchasing, supplier, and other financial and accounting data, through the Internet or extranets. Although we have security systems in place, there can be no assurance that this information will not be subject to computer break-ins, theft, and other improper activity that could jeopardize the security of information for which we are responsible. Any such lapse in security could expose us to litigation, loss of customers, or other harm to our business. In addition, any person who is able to circumvent our security measures could misappropriate proprietary or confidential customer information or cause interruptions in our operations. We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches. Any general concern regarding security in the marketplace could deter customers or prospects from using the Internet to conduct transactions that involve transmitting confidential information. Our failure to prevent security breaches, or well-publicized security breaches affecting the Internet in general, could significantly harm our business, operating results, and financial condition.
RISKS ASSOCIATED WITH OUR MARKET, CUSTOMERS AND PARTNERS
(19) If Our On-Demand Application Service is Not Widely Accepted, Our Operating Results Will Be Harmed.12
Historically, we have derived a small percentage of our revenue from subscriptions to our on-demand application service, but our business plan requires us to substantially increase this source of revenue in the future. As a result, widespread acceptance of our service is critical to our future success. Factors that may affect market acceptance of our service include:
Many of these factors are beyond our control. The inability of our service to achieve widespread market acceptance would harm our business.
(20) The Market for Our Technology Delivery Model and On-Demand Application Services Is Immature And Volatile, and if It Does Not Develop or Develops More Slowly Than We Expect, Our Business Will Be Harmed.The market for on-demand application services is new and unproven, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of businesses to increase their use of on-demand application services. Many businesses have invested substantial personnel and financial resources to integrate traditional business software into their businesses, and therefore may be reluctant or unwilling to migrate to on-demand application services. Furthermore, some businesses may be reluctant or unwilling to use on-demand application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If businesses do not perceive the benefits of on-demand application services, then the market for these services may not develop at all, or it may develop more slowly than we expect, either of which would significantly adversely affect our operating results. In addition, because this is an unproven market, we have limited insight into trends that may develop and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business.
(21) We Do Not Have an Adequate History With Our Subscription Model To Predict the Rate of Customer Subscription Renewals and the Impact These Renewals Will Have on Our Revenue or Operating Results.Our small business customers do not sign long-term contracts. Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period and in fact, customers have often elected not to do so. In addition, our customers may renew for a lower priced edition of our service or for fewer users. We have limited historical data with respect to rates of customer subscription renewals, so we cannot accurately predict customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their dissatisfaction with our service and their ability to continue their operations and spending levels. If our customers do not renew their subscriptions for our service, our revenue may decline and our business will suffer.
(22) We Depend on Small Businesses for Our Revenue. Small Businesses are Often Financially Unstable, Have High Rates of Attrition and can be Expensive Customers to Which to Market Products.13
Substantially all our revenue is derived directly or indirectly from small business customers with fifty or fewer employees, whether directly or from our partners who do business with small businesses. Although this is a large market, it can be very expensive to penetrate this market. Each customer results in only a small amount of revenue. In addition, small businesses are often financially unstable, which can cause them to go out of business. Our small business customers, typically have short initial subscription periods and, based on our experience to date, have had a higher rate of attrition and non-renewal as compared to medium-sized and large enterprise customers. If we cannot replace our small business customers that do not renew their subscriptions for our service with new customers quickly enough, our revenue could decline. This adversely affects our ability to develop long-term customer relationships. We must continually attract new customers to maintain the same level of revenue.
(23) If We Fail to Develop Our Brand Cost-Effectively, Our Business May Suffer.We believe that developing and maintaining awareness of the Smart Online brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future services and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market develops. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. In the past, our efforts to build our brand have involved significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
(24) We Depend on Corporate Partners to Market Our Products Through Their Web Sites and OEM or Integration Relationships Under Relatively Short Term Agreements. Termination of These Agreements Could Cause A Substantial Decline in Our Revenue and a Substantial Increase in Customer Acquisition Costs.Approximately 69.3% of total revenue during year 2003 was derived from syndication, integration and OEM agreements with large companies whereby our content, software applications and technology platform are integrated into the web sites of our partners and are bundled with the products through our OEM relationships. Under these agreements we both derive revenue and we utilize the resources of our partners to reduce our customer acquisition costs. We currently have seven syndication agreements, where we have our content and software on the website of large corporate partners. We currently have nine integration partnership agreements where we integrate the content or services of one of our partners into our technology platform. We currently have one OEM relationship through our distributor, PC Treasures. These agreements typically have terms of from one to five years. In the event these agreements were to terminate or not be renewed, or their terms substantially renegotiated, we expect that our revenues would decline and our customer acquisition costs would increase.
(25) It is Important for Us to Continue to Develop and Maintain Strategic Relationships.We depend on syndication and integration partners, OEM relationships and referral relationships to offer products and services to a larger customer base than we can reach through direct sales, and other marketing efforts. Approximately 80% of our total revenue during 2002 and approximately 69% of our total revenue during 2003 was derived through such relationships. If we were unable to maintain our existing strategic relationships or enter into additional strategic relationships, we would have to devote substantially more resources to the distribution, sales, and marketing of our products and services. Our success depends in part on the ultimate success of our syndication and integration partners, OEM relationships and referral partners and their ability to market our products and services successfully. Our partners are not obligated to provide potential customers to us. In addition, some of these third parties have entered, and may continue to enter, into strategic relationships with our competitors. Further, many of our strategic partners have multiple strategic relationships, and they may not regard us as significant for their businesses. Our strategic partners may terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products or services. Our strategic partners also may interfere with our ability to enter into other desirable strategic relationships.
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Our syndication and integration partners and OEM relationships typically commit significant resources to an evaluation of available solutions and require us to expend substantial time, effort, and money educating them about the value of our services and software. Our sales cycle, which is the time between initial contact with a potential partner and ultimately signing a contract, is often lengthy and unpredictable. As a result, we have limited ability to forecast the timing and size of new specific partnering and OEM relationships. In addition, revenue may not begin to flow from such contracts until long after they are signed due to delays in implementing the contracts or the failure of our partners to devote the resources required to promote our products to small businesses. Any delay in signing or implementing syndication, integration and OEM contracts or other strategic agreements could cause our operating results to vary significantly.
(27) We Face Significant Competition.The market for our solutions is intensely competitive and rapidly changing. The direct competition we face depends on the market segment focus and delivery model capabilities of our competitors. We also, at times have to overcome their reluctance to move away from existing paper-based systems. Our principal direct competition primarily comes from large companies, such as Microsoft, Oracle, Intuit, SAP and Yahoo!, who provide multiple software products used by many small businesses. In addition, we face competition from smaller competitors who sell single applications. Many of our competitors have longer operating histories, greater financial, technical, marketing, and other resources, greater name recognition, and a larger total number of customers for their products and services than we do. Some of our competitors sell many products to our current and potential customers, as well as to systems integrators and other vendors and service providers. These competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products, than we may. In addition, we anticipate new competitors will enter the market in the future. Increased competition may result in price reductions, reduced gross margins, and change in market share and could have a material adverse effect on our business, financial condition, and results of operations.
(28) We Depend on Nonrecurring Revenue, Which May Cause Our Revenue to Fluctuate Substantially From One Quarter to Another or to Decline Permanently as Market Conditions Change.We depend on nonrecurring revenue. Nonrecurring revenue is primarily derived from integration fees and other up-front payments received upon signing syndication and integration agreements with corporate partners for which we charge a one-time fee. This revenue may fluctuate substantially from one quarter to another. In addition, such revenue may substantially decrease on a permanent basis due to market conditions over which we have little or no control, including competitors introducing new products to the market or reducing the price of competing products.
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Revenues from small businesses for our Web Services, which include subscriptions, revenue share, e-commerce fees, hosting fees, loan origination fees and marketing fees, represented 16.5% of total revenues for fiscal 2003. We anticipate that Web Services revenues will continue to represent a significant percentage of our total revenues and that our future financial performance and revenue growth will depend, in large part, upon the growth in customer demand for our outsourced services delivery models. As such, we have invested significantly in infrastructure, operations, and strategic relationships to support these models, which represent a significant departure from the delivery strategies that other software vendors and we have traditionally employed. To maintain positive margins for our small business services, our revenues will need to continue to grow more rapidly than the cost of such revenues. There can be no assurance that we will be able to maintain positive gross margins in our subscription services delivery models in future periods. If our subscription services business does not grow sufficiently, we could fail to meet expectations for our results of operations, which could harm our business.
Any delays in implementation may prevent us from recognizing subscription revenue for periods of time; even when we have already incurred costs relating to the implementation of our subscription services. Additionally, customers can cancel our subscription services contracts at any time and, as a result, we may recognize substantially less revenue than we expect. If large numbers of customers cancel or otherwise seeks to terminate subscription agreements quicker than we expect, our operating results could be substantially harmed. To become successful, we must increase the length of time subscribers pay subscription fees.
(30) There are Risks Associated with International Operations, Which We Expect Will Become a Bigger Part of Our Business in the Future.We currently do not generate substantial revenue from international operations, but we plan to conduct greater international operations in the future. Our international operations will be subject to risks associated with operating abroad. We expect international operations will become an important component of our business. These international operations are subject to a number of difficulties and special costs, including:
Our international operations will also face foreign currency-related risks. To date, most of our revenues have been denominated in United States Dollars, but we believe that an increasing portion of our revenues will be denominated in foreign currencies. We currently do not engage in foreign exchange hedging activities, and therefore our international revenues and expenses are currently subject to the risks of foreign currency fluctuations.
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We must also customize our services and products for international markets. This process is much more complex than merely translating languages. For example, our ability to expand into international markets will depend on our ability to develop and support services and products that incorporate the tax laws, accounting practices, and currencies of applicable countries. Since a large part of our value proposition to customers is that our products have been developed with the peculiar needs of small businesses in mind, any variation in business practice from one country to another may substantially decrease the value of our products in that country, unless we identify the important differences and customize our product to address the differences.
Our international operations also increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our services and products or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business in international markets.
We intend to continue to expand our international sales and marketing activities and enter into relationships with additional international distribution partners. We are in the early stages of developing our indirect distribution channels in markets outside the United States. We may not be able to attract and retain distribution partners that will be able to market our products effectively.
RISKS
ASSOCIATED WITH OUR
OFFICERS,
DIRECTORS, EMPLOYEES AND STOCKHOLDERS
To achieve our business plan, we will need to hire additional employees. In particular, we will seek to recruit additional software developers, marketing and sales personnel and internal financial and audit professionals, including a chief financial officer with experience in publicly traded companies. Our success depends in large part on our ability to continue to attract, motivate, and retain highly qualified personnel. Competition for such personnel is intense and there can be no assurance that we will be successful in attracting, motivating, and retaining key personnel. Many of our competitors have greater financial and other resources than us for attracting experienced personnel. We also compete for personnel with other software vendors and consulting and professional services companies. The inability to hire and retain qualified personnel or the loss of the services of key personnel would harm our business.
(32) Any Failure to Adequately Expand Our Direct Sales Force Will Impede Our Growth.
We expect to be substantially dependent on our direct sales force to obtain new customers. We believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge we need. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient direct sales personnel. New hires require significant training and may, in some cases, take more than a year before they achieve full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire and develop sufficient numbers of productive sales personnel, sales of our services will suffer.
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To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers with high levels of experience in designing and developing software and Internet-related services and senior sales executives. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Significant volatility in the price of our stock after this offering may, therefore, adversely affect our ability to attract or retain key employees. Furthermore, proposed changes to accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock options awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
(34) Our Growth Could Strain Our Personnel and Infrastructure Resources, and if We Are Unable to Implement Appropriate Controls and Procedures To Manage Our Growth, We May Not Be Able to Successfully Implement Our Business Plan.We plan to have a period of rapid growth in our headcount and operations, which has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate that further growth will be required to address increases in our customer base, as well as our expansion into new geographic areas.
Our success will depend in part upon the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
(35) Our Executive Management Team is Critical to the Execution of Our Business Plan and the Loss of Their Services Could Severely Impact Negatively on Our Business.
Our success depends significantly on the continued services of our management personnel, including, Michael Nouri, who is our chairman of the board, president and chief executive officer, and Henry Nouri, our chief technical officer. Losing any one of our officers could seriously harm our business. Competition for executives is intense. If we had to replace any of our officers, we would not be able to replace the significant amount of knowledge that they have about our operations. We do not maintain key man insurance policies on anyone.
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At September 29, 2004, our officers and directors beneficially owned approximately 4,978,995 (approximately 40%) of our outstanding stock, which includes approximately 850,000 shares which can be acquired upon exercise of options within sixty (60) days after September 29, 2004. These shares included approximately 3,892,658 shares beneficially owned by Michael Nouri and Henry Nouri, who are brothers and Ronna Loprete, who is Michael Nouri’s wife. In addition 250,000 shares are subject to issuance upon exercise of options owned by the officers and directors, which options cannot be exercised on or before November 29, 2004, and therefore are not counted as being beneficially owned at September 29, 2004. An additional 1,448,619 shares are owned by an entity in which an officer owns a 28.5% interest. As a result, these persons, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of us, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially and adversely affect the market price of the common stock.
(37) Sales by Officers and Directors Could Adversely Affect of Our Stock.Sales of significant amounts of shares held by our directors and executive officers after their contractual lock-up provisions expire, or the prospect of these sales, could adversely affect our common stock, both because significant sales could depress prices, and because sales by management could provide a negative signal to the market about our prospects.
(38) All of the Shares of Common Stock Owned by Our Officers, Directors and Consultants Will be Registered Later in a Registration on Form S-8 and May be Resold by Them, Which May Have a Negative Impact on Their Interest in Smart Online’s Future.We intend to register all of the shares of our outstanding common stock, including all of the shares held by our officers, directors and consultants. This will allow our officers, directors and consultants to more easily sell all of their Smart Online stock after their contractual lock-up restrictions expire, which may have a negative impact on their interest in the future success of Smart Online.
REGULATORY RISKS
(39) Our Revenue Recognition Policy May Change And Affect Our Earnings.We believe our current revenue recognition policies and practices are consistent with applicable accounting standards. However, revenue recognition rules for software and service companies are complex and require significant interpretations by management. Changes in circumstances, interpretations, or accounting guidance may require us to modify our revenue recognition policies. Such modifications could impact the timing of revenue recognition and our operating results. See “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” regarding our current revenue recognition policies.
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Many new laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act, impose new obligations on public companies. Preparing for and implementing these reforms and enhanced new disclosures requires us to incur significant additional accounting and legal costs. We estimate this will add approximately $500,000 to our expenses during our first year as a public company. Any unanticipated difficulties in preparing for and implementing these reforms could result in material delays in complying with these new laws and regulations or significantly increase our costs. Our ability to fully comply with these new laws and regulations is also uncertain. Our failure to timely prepare for and implement the reforms required by these new laws and regulations could significantly harm our business, operating results, and financial condition. We will seek to hire a chief financial officer who has public company experience, but we currently do not have a chief financial officer. Until we hire such a person, we will have greater difficulty complying with public company reporting requirements than most public companies.
(41) Our Reported Financial Results May Be Adversely Affected By Changes in Accounting Principles Generally Accepted in the United States.Accounting principles generally accepted in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
For example, we currently are not required to record stock-based compensation charges if the employee’s stock option exercise price is equal to or exceeds the deemed fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and begun to record the fair value of stock options as an expense. Although the standards have not been finalized and the timing of a final statement has not been established, FASB has announced its support for recording expense for the fair value of stock options granted. If we were required to change our accounting policy in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148. Accounting for Stock-Based Compensation—Transition and Disclosure , and retroactively restate prior periods as if we had adopted these standards for all periods presented, then our cost of revenues and operating expenses would have increased by approximately $2,142 for the year ended December 31, 2002, $426,234 for the year ended December 31, 2003, $90,117 for the six months ended June 30, 2003, and $255,534 for the six months ended June 30, 2004.
(42) Privacy Concerns are Increasing, Which Could Result in Regulatory Changes that may Harm Our Business.Personal privacy has become a significant issue in the United States and many other countries in which we operate. The United States and various other countries have recommended limitations on, or taken actions to limit, the use of personal information by those collecting such information. For example, in 1999, Congress enacted the Gramm-Leach-Bliley Act, which contains provisions protecting the privacy of consumer non-public personal information collected by financial institutions. Any new or existing privacy laws, if applicable to our business, could impose additional costs and could limit our use and disclosure of such information. If such privacy laws were deemed to apply to us, we may be required to change our activities and revise or eliminate our services, which could significantly harm our business.
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As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for our services and restricting our ability to store, process and share data with our customers. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.
(44) Our Ability to Protect Our Intellectual Property is Limited and Our Products may be Subject to Infringement Claims by Third Parties.Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information, and our ability to protect this information from unauthorized disclosure and use. We rely on a combination of copyright, trade secret, and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. We do not own any issued patents or have any patent applications pending. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary, and third parties may attempt to develop similar technology independently. Policing unauthorized use of our products is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted. While we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase our international presence. Over the past several years, we have made numerous changes in our product names. Although we own registered trademarks in the United States and have filed trademark applications in the United States and in certain other countries, we do not have assurance that our strategy with respect to our trademark portfolio will be adequate to secure or protect all necessary intellectual property. There can be no assurance that our means of protecting these proprietary rights will be adequate, or that our competitors will not independently develop similar technology.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows. Our technologies may not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention from executing our business plan. In addition, our agreements often require us to indemnify our syndication partners for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling in such a claim. An adverse determination could also prevent us from offering our service to others.
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There are provisions in our certificate of incorporation and bylaws, as well as provisions in the Delaware General Corporation Law, that may discourage, delay or prevent a change of control, including the following: our board of directors may, without stockholder approval, issue shares of preferred stock with special voting or economic rights; our stockholders do not have cumulative voting rights, and, therefore, each of our directors can only be elected by holders of a majority of our outstanding common stock; a special meeting of stockholders may only be called by a majority of our board of directors, the Chairman of our board of directors, or our chief executive officer; our stockholders may not take action by written consent; our board of directors is divided into three classes whenever the number of Directors is six or more, in which case, approximately one-third of our Board of Directors will be elected each year; and we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
RISKS ASSOCIATED WITH OUR OFFERING
(46) We May Not Qualify to Have Our Stock Quoted for Trading on the Over-the-Counter Electronic Bulletin Board, and Therefore You may be Unable to Sell Your Shares. Even if We Qualify to Have Our Stock Quoted for Trading, Trading Volume May Not Develop and You May be Unable to Sell Your Shares.Upon completion of this offering, we will seek to have our common stock eligible for quotation in the Over-the-Counter Electronic Bulletin Board (“ OTCBB ” or “ Bulletin Board ”) or listing on NASDAQ or a national securities exchange, if we satisfy the listing criteria. OTCBB eligible securities include securities not listed on NASDAQ or a registered national securities exchange in the U.S., issued by companies that are required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act of 1933, if such companies are current in their periodical reporting obligations. Smart Online intends to engage a broker/dealer who will file a Form 211 with the National Association of Securities Dealers (“ NASD ”), which is required to allow our common stock to be quoted on the OTCBB. For more information on the OTCBB see its web site at www.otcbb.com . If for any reason, however, any of our securities are not eligible for continued quotation on the Bulletin Board or a public trading market does not develop, purchasers of the shares may have difficulty selling their securities should they desire to do so. If we are unable to satisfy the requirements for quotation on the Bulletin Board, any trading in our common stock would be conducted in the over-the-counter market in what are commonly referred to as the “pink sheets.” As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the securities offered hereby. The above-described rules may materially adversely affect the liquidity of the market for our securities. There has been no public market for our common stock. There can be no assurance that an active trading market will ever develop or, if it develops, will be maintained. Failure to develop or maintain an active trading market could negatively affect the price of our securities, and you will be unable to sell your shares. If so, your investment will be a complete loss.
(47) If Securities Analysts Do Not Publish Research or Reports About Our Business or If They Downgrade Our Stock, the Price of Our Stock Could Decline.The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well established publicly traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
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Our quarterly revenues and operating results may fluctuate significantly from quarter to quarter. We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of our future performance. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include:
In addition, due to the continuing slowdown in the general economy and general uncertainty of the current geopolitical environment, we believe that many existing and potential customers are reassessing or reducing their planned technology and Internet-related investments and deferring purchasing decisions. Further delays or reductions in business spending for technology could have a material adverse effect on our revenues and operating results. As a result, there is increased uncertainty with respect to our expected revenues.
(49) Our Stock Price is Likely to be Highly Volatile and May Decline.If it becomes publicly traded, the trading price of our common stock is expected to fluctuate widely as a result of a number of factors, many of which are outside our control, such as:
In addition, the stock market, particularly the NASD’s Over-the-Counter Bulletin Board, on which we intend to have our stock quoted has experienced extreme price and volume fluctuations that have affected the market prices of many technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock.
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Further, securities class action litigation has often been brought against companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources. If such a suit is brought against us, we may determine, like many defendants in such lawsuits, that it is in our best interests to settle such a lawsuit even if we believe that the plaintiffs’ claims have no merit, to avoid the cost and distraction of continued litigation. Any liability we incur in connection with this lawsuit could materially harm our business and financial position and, even if we defend ourselves successfully, there is a risk that management’s distraction in dealing with this type of lawsuit could harm our results.
The securities offered hereby are highly speculative and involve substantial risks. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before deciding whether to invest in shares of our common stock. Any of the following risks could cause the value of our common stock to decline.
(50) Shares Eligible for Public Sale After this Offering Could Adversely Affect Our Stock Price/At September 29, 2004, 11,659,372 shares of our common stock were issued and outstanding and 1,856,538 shares may be issued pursuant to the exercise of warrants and options that are exercisable within 60 days of September 29, 2004. Of these shares, the 1,699,993 shares registered in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act. The remaining shares will be “restricted securities,” subject to the volume limitations and other conditions of Rule 144 under the Securities Act.
We cannot predict if future sales of our common stock, or the availability of our common stock held for sale, will materially and adversely affect the market price for our common stock or our ability to raise capital by offering equity securities. Our stock price may decline, if the resale of shares under Rule 144, in addition to the resale of registered shares, at certain time in the future, exceeds the market demand for our stock.
Unless a trading market for our shares develops, you will not be able to resell your stock, and, market makers may influence the stock price. Market conditions and market makers may cause your investment in our common stock to significantly diminish and may become very illiquid.
Special Note Regarding Forward-Looking Statements
This Registration Statement contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. You can identify these statements by our use of the future tense, or by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “continue,” and other similar words and phrases. Examples of sections containing forward-looking statements include “Business” and “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.” These forward-looking statements involve many risks and uncertainties. Examples of such risks and uncertainties are described under “Factors That May Affect Financial Condition And Results Of Operations” and elsewhere in this report, as well as in other filings we may make from time to time with the United States Securities and Exchange Commission. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this report are based on information available to us as of the date of this report. We assume no obligation or duty to update any such forward-looking statements.
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Smart Online will receive none of the proceeds of resales of common stock by selling security holders in this offering. All offering proceeds from resales of common stock by the selling security holders will be received by the selling security holders. See “Selling Security Holders.” If warrants are exercised and warrant holders choose not to exercise the warrants using the cashless exercise provision of the warrants, Smart Online will receive $3.50 per share issued on exercise of the warrants to purchase 281,138 shares from warrants issued to investors in a private placement during 2004 for an aggregate exercise price of $983,983. Smart Online does not know if the warrants will be exercised or how many warrant holders will exercise using the cashless exercise provisions. Any amounts received upon exercise of warrants will be used as determined by Smart Online in its sole discretion.
DETERMINATION OF OFFERING PRICE
No public market currently exists for shares of our common stock. The price of the shares the Selling Security Holders are offering is arbitrarily determined. The offering price bears no relationship whatsoever to our assets, earnings, book value or other criteria of value.
The shares of common stock being offered by the selling security holders (i) were issued in a private placement conducted through March 2004 through September 27, 2004 and pursuant to registration rights agreements executed in connection with the private placement; or (ii) are issuable upon exercise of common stock purchase warrants; or (iii) were issued in exchange for a warrant. We are registering these shares of our common stock for resale by the selling security holders identified below. The shares are being registered to permit public secondary trading of the shares, and the selling security holders may offer the shares for resale from time to time. See “Plan of Distribution.” It is possible that the selling security holders may not sell all of the securities being offered. The following table and the footnotes to the table sets forth:
This information is based upon information provided by each respective selling security holder to Smart Online. The term “selling security holders” includes the security holders listed below and their transferees, pledgees, donees or other successors. To our knowledge, the named persons beneficially own and have sole voting and investment power over all shares or rights to these shares, except where indicated otherwise. The numbers in this table assume that none of the selling security holders sells shares of common stock not being offered in this prospectus or purchases additional shares of common stock, and assumes that all shares offered are sold. The percentages are based on 11,940,510 shares of common stock outstanding on September 29, 2004, which figure includes 281,138 warrants owned by selling security holders that are exercisable within 60 days of September 29, 2004.
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The preceding table was prepared based solely upon information furnished to us as of September 29, 2004 by the selling security holders listed above. The selling security holders identified above may have sold, transferred or otherwise disposed of, in transactions exempt from the registration requirements of the Securities Act, all or a portion of their shares since the date on which the information in the preceding table is presented. Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option or a warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the number of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on September 29, 2004. As of September 29, 2004, there were 11,940,510 shares issued and outstanding, which number includes 281,138 warrants owned by the selling security holders which are exercisable within 60 days of September 29, 2004. |
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| (2) |
Includes an aggregate of 281,138 shares of common stock the Selling Security Holders may acquire pursuant to the exercise of outstanding warrants, which may be exercised within sixty (60) days after September 29, 2004. |
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| (3) | If one percent or more, and assuming sale of all shares registered in this offering. | |
| (4) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 3,000 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (5) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 7,500 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (6) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 237,428 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (7) |
Includes shares of common stock issued in 1998 and converted from preferred to common and shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement. |
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| (8) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement. |
|
| (9) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 3,000 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (`10) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (`11) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 3,150 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (12) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,800 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (13) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 12,600 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (14) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,260 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (15) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (16) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
|
| (17) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
|
| (18) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
|
| (19) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 3,000 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (20) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (21) |
Includes shares of common stock issued in a private placement conducted during March 2004 through September 27, 2004 and pursuant to a registration rights agreement signed in connection with that private placement and approximately 1,200 shares of common stock issuable upon the exercise of immediately exercisable common stock purchase warrants issued in the same private placement having an exercise price of $3.50 per share. |
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| (22) |
Includes 17,000 shares which may be acquired upon exercise of outstanding warrants owned by Cap Partners LLC, which is controlled by Messrs. Bernhardt, Perkins, Hoyle and Miller. These warrants may be exercised within sixty (60) days after September 29, 2004. These shares are not included in this offering. Does not include 10,000 shares subject to outstanding stock options of Mr. Bernhardt, which options cannot be exercised within sixty days after September 29, 2004. |
Relationships of Selling Security Holders
Except as described herein, during the three years prior to the effective date of this registration statement, none of the selling security holders:
has had a material relationship with us other than as a security holder at any time within the past three years, except for agreements entered into in connection with their investments and described herein ; or
has ever been one of our officers or directors; or
are broker-dealers or affiliated with broker-dealers.
Bank One, NA, an affiliate of J P Morgan Chase & Co. which owns shares of common stock we are registering for re-sale, is a private label syndication partner of Smart Online. The shares were issued to J P Morgan Chase & Co. in exchange for a warrant Smart Online issued to Bank One, NA at the time the private label syndication contract was signed in year 2001.
Four of the selling security holders (Richmond Bernhardt, David Perkins, William Hoyle and J. Fielding Miller) control two companies that have consulting relationships with us involving assisting us to develop new integration partners. One of those entities, Cap Financial Partners LLC, is a registered broker-dealer and a registered investment advisor. Richmond Bernhardt is also a member of our Board of Advisors.
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Agreements With Selling Security Holders
At the time of their investment in Smart Online, we entered into registration rights agreements with the selling security holders. In accordance with registration rights granted to the selling security holders, we have filed with the Securities and Exchange Commission, under the Securities Act, a registration statement on Form SB-2, of which this prospectus forms a part, with respect to the re-sales of the shares from time to time on the Over the Counter Bulletin Board or in other markets in which shares of our common stock may be traded from time to time, in privately-negotiated transactions, or otherwise, and have agreed to prepare and file such amendments and supplements to the registration statement as may be necessary to keep such registration statement effective until earlier of (i) 270 days after the effective date of this registration statement, (ii) the date on which all the registered securities have been sold by the selling security holders, and (iii) all the shares registered hereunder can be resold by the selling security holders without a registration statement being in effect. Smart Online is issuing approximately 58,226 shares of its common stock to certain of the Selling Security Holders pursuant to a provision of the registration rights agreement that imposes a penalty on Smart Online, if a registration statement is not filed by July 1, 2004. We also have a private label syndication agreement with Bank One, NA, an affiliate of J P Morgan Chase & Co.
At the same time, the selling security holders agreed to restrict the number of shares of our common stock they can sell during any month. Refer to “Market for Common stock – Lock-up Agreements Applicable to Certain Holders of Our Common Stock” for a description of these contractual restrictions on resale of common stock by the selling security holders.
In March 2004 and August 2004 Atlas Capital SA also entered into put agreements with two of our stockholders whereby Atlas has the right to require these two stockholders to purchase from Atlas all the shares of Smart Online stock and warrants owned by Atlas under certain circumstances. Refer to “Certain Relationships and Related Transactions” for a description of the terms of this put agreement.
The shares of common stock may be sold from time to time by the selling security holders in one or more transactions at fixed prices, at market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The selling security holders may offer their shares of common stock in one or more of the following transactions, including block transactions:
When we use the term “selling security holder” in this prospectus, it includes donees, pledgees and other transferees who are selling shares received after the date of this prospectus from a selling security holder whose name appears in “Selling Security Holders.” If we are notified by a selling security holder that a donee, pledgee or other transferee intends to sell more than 25,000 shares, we will file a prospectus supplement if required by law. In addition, if required, we will distribute a supplement to this prospectus to describe any material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold from time to time directly by the selling security holders. Alternatively, the selling security holders may from time to time offer shares of common stock to or through underwriters, broker/dealers or agents. The selling security holders and any underwriters, broker/dealers or agents that participate in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”) and will be subject to the prospectus delivery requirements of the Securities Act. Any profits on the resale of shares of common stock and any compensation received by any underwriter, broker/dealer or agent may be deemed to be underwriting discounts and commissions under the Securities Act.
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Any shares covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may, in the discretion of each selling securityholder, be sold under Rule 144 rather than under the terms of this prospectus. Refer to “Market for Common Stock” for a description of Rule 144. The selling security holders may decide not to sell all of the shares offered pursuant to this prospectus. The selling security holders may transfer such shares by will, gift or other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common stock must be offered or sold only through registered or licensed brokers or dealers. In addition, in certain jurisdictions, the common stock may not be offered or sold unless they have been registered or qualified for sale or an exemption is available in that jurisdiction and complied with.
The selling security holders may also sell their shares directly to market makers acting as principals or brokers or dealers, who may act as agent or acquire the common stock as a principal. Any broker or dealer participating in such transactions as agent may receive a commission from the selling security holders, or, if they act as agent for the purchaser of such common stock, from such purchaser. The selling security holders will likely pay the usual and customary brokerage fees for such services. Brokers or dealers may agree with the selling security holders to sell a specified number of shares at a stipulated price per share and, to the extent such broker or dealer is unable to do so acting as agent for the selling security holders, to purchase, as principal, any unsold shares at the price required to fulfill the respective broker’s or dealer’s commitment to the selling security holders. Brokers or dealers who acquire shares as principals may thereafter resell such shares from time to time in transactions in a market or on an exchange, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices, and in connection with such re-sales may pay or receive commissions to or from the purchasers of such shares. These transactions may involve cross and block transactions that may involve sales to and through other brokers or dealers. If applicable, the selling security holders may distribute shares to one or more of their partners who are unaffiliated with us. Such partners may, in turn, distribute such shares as described above. We can provide no assurance that all or any of the common stock offered will be sold by the selling security holders.
Under the applicable rules and regulations of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), any person engaged in the distribution of the common stock may not bid for or purchase shares of common stock during a period which commences one business day (5 business days, if Smart Online’s public float is less that $25 million or the average daily trading volume of its stock is less than $100,000) prior to such person’s participation in the distribution, subject to exceptions for certain passive market making activities. In addition and without limiting the foregoing, each selling security holder will be subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M, which provisions may limit the timing of purchases and sales of shares of Smart Online’s common stock by such selling security holder or any such other person. These factors may affect the marketability of the common stock and the ability of brokers or dealers to engage in market-making activities.
Smart Online agreed to register the shares under the Securities Act and to indemnify and hold the selling security holders harmless against certain liabilities under the Securities Act that could arise in connection with the sale of the shares by the selling security holders. Smart Online has agreed to pay all reasonable fees and expenses incident to the filing of this registration statement. The selling security holder will pay all brokerage commissions and similar selling expenses, if any, attributable to its sale of shares. Refer to “Selling Security Holders” for a description of the registration rights of the selling security holders.
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Resale of the shares registered hereunder is subject to restriction by contractual agreements between Smart Online and the selling security holders. Refer to “Market For Common Stock – Lock-up Agreements Applicable to Certain Holders of Our Common Stock” for a description of these contractual restrictions. In addition, Atlas Capital SA, a selling security holder, has the right to require two other stockholders of Smart Online to purchase all shares of common stock and warrants of Smart Online. Refer to “Certain Relationships and Related Transactions” for a description of the terms of this put agreement.
Any dealer or broker participating in any distribution of the common stock may be required to deliver a copy of this prospectus, including a prospectus supplement, if any, to any person who purchases any of the shares from or through this dealer or broker.
We have never declared or paid any cash dividends on our common stock. We anticipate that any earnings will be retained for development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has sole discretion to pay cash dividends, based on our financial condition, results of operations, capital requirements, contractual obligations and other relevant factors. We have agreed to pay certain of our existing stockholders a percentage of the equity capital we raise during 2004 in connection with a reorganization of our capital structure in the first quarter of 2004. Refer to “Certain Relationships and Related Transactions – Corporate Reorganization” for a description of this payment obligation.
Special Note Regarding Forward-Looking Statements
This Registration Statement contains forward-looking statements regarding our plans, objectives, expectations, intentions, future financial performance, future financial condition, and other statements that are not historical facts. You can identify these statements by our use of the future tense, or by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “continue,” and other similar words and phrases. Examples of sections containing forward-looking statements include “Business” and “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.” These forward-looking statements involve many risks and uncertainties. Examples of such risks and uncertainties are described under “Factors That May Affect Financial Condition And Results Of Operations” and elsewhere in this Registration Statement, as well as in our other filings with the United States Securities and Exchange Commission, which we may make from time to time. You should be aware that the occurrence of any of these risks and uncertainties may cause our actual results to differ materially from those anticipated in our forward-looking statements, which could have a material adverse effect on our business, results of operations, and financial condition. All forward-looking statements included in this Registration Statement are based on information available to us as of the date of this Registration Statement. We assume no obligation or duty to update any such forward-looking statements.
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Overview
Smart Online develops and markets Internet-delivered Software-as-Services (SaS) software applications and data resources to start, run, protect and grow small businesses (one to fifty employees). We have many direct small business subscribers through our portal at www.SmartOnline.com , and we reach many small businesses through private label syndication partnering agreements pursuant to which we offer our products on the web sites of major companies and financial institutions. Expanding this network of relationships with large companies is one of our key strategies to generate revenue while minimizing our marketing and sales expenses.
Incorporated in Delaware in 1993, Smart Online pioneered the market for small business software applications. Our initial offerings were on diskettes and later became CD-ROM-based. Since inception, we have distributed over two million copies of CD-ROM based products through direct sales, distributors and other means. Since year 2000, our products have been primarily offered through an Internet-based platform. Business and trade publications, such as Forbes, PC Magazine and American Banker , have praised Smart Online’s products for small companies.
Smart Online has developed numerous sources of revenue as its business plan has changed to adapt to changing business circumstances. These sources of revenue include syndication partners, integration partners, OEMs, subscriptions from small businesses, one-time purchases by small businesses and barter transactions with media companies. Currently, each of these revenue streams is small. Our business plan is designed to utilize existing and future relationships in each revenue source to ratchet up the amount of revenue we derive from all sources. We have described below the key elements of how we plan to achieve this.
Software as Service (SaS) Advantages. Our Software as Service (SaS) model is beneficial to small business owners because:
SaS is less expensive compared to software distributed by other means and offers predictable implementation and management costs. Companies pay a monthly or annual per-user subscription fee for access to software services and are spared up-front costs of buying hardware and software and hiring specialized IT personnel. The price tag of SaS solutions typically runs about one-third of the cost of deploying similar software in-house.
SaS offers customers lower risk and faster return-on-investment. With reduced overhead investment and quicker implementation, customers can afford to try SaS applications and gain benefits more quickly.
SaS is easier to use, requiring less training. Use of familiar Web interfaces makes it easy for customer administrators and end users to use new software, resulting in higher end-user adoption and lower training costs.
SaS enables vendors to provide more responsive service and support. SaS vendors know in real-time how their customers use the system and which features work and don’t work. Problems need be fixed only once for the benefit of all customers.
Small Business Focus. Smart Online is a leading provider of software applications for small businesses. We define small businesses as companies that have between one and fifty employees. We believe there are approximately 23 million small businesses in the U.S. Our solutions are designed to automate and streamline business processes, reduce operating costs and improve internal controls.
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Market Channels. Our products and services are sold through private label syndication on major corporation and financial institution web sites (such as Bank One, Union Bank of California, Gruner +Jahr USA Publishing for its www.Inc.com and www.FastCompany.com web sites, and NCB Capital, a Division of National Cooperative Bank (NCB), and through OEM distribution deals by our distributor, PC Treasures, including with Dell and Gateway Computers, and directly to small business owners at www.smartonline.com .
Integration Partners. Smart Online distributes the products and services of other companies on its website and the websites of its syndication partners. These integration partners include providers of press releases, incorporation services and loans to small businesses. Integration partners share revenue with Smart Online. We recently signed a contract with Pitney Bowes to provide postage services through the Smart Online portal.
Value Proposition. We deliver value to small business users and to our syndication, integration and OEM partners through a combination of three factors. First, like other vendors we have a wide range of useful software applications and content. Unlike most other vendors, however, both our applications and our content have been designed and redesigned utilizing the experience we have gained through dealing with large numbers of small businesses over a period of more than ten years. With over two million copies of CD-ROM based products distributed, our Internet-based products incorporate the input we obtained from CD-ROM customers. In short, trial and error has taught us what works for small business users and what doesn’t. Finally, our robust, proprietary technology platform delivers our applications and content in ways that maximize usefulness and efficiency. We believe this combination of factors provides our customers with both substantial savings and easy-to-use solutions for the most common issues faced by small businesses.
Software Applications. We offer approximately two dozen applications and information resources that assist small businesses with:
We provide extensive data resource offerings that cover a broad range of business, financial, legal, human resources, operations, and marketing and sales issues, as well as real-time contact with experts in each of these functional areas.
Technology Platform. Our proprietary technology platform delivers our products and services in ways that best suit small business users and our syndication, integration and OEM partners.
User InterfaceWizards. Smart Online products and services feature easy-to-use wizard interfaces that utilize a series of fill-in-the-blank questionnaires. In addition, once the user inputs data, it is shared as appropriate throughout the platform so information need only be input once. This important feature of our current platform will be substantially more robust in our next generation platform.
Single Sign On For Third Party Content Integration. Our platform allows us to distribute third-party partner content seamlessly to small business users using proprietary single sign-on methodology. After the user signs onto our web site, the user does not have to re-register with our integration partners to use applications supplied by our partners.
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Contextual Integration Engine (CI Engine). Our CI Engine delivers to small business users those products and services of Smart Online and our integration partners that is most pertinent to the user at that time.
Private Label Syndication Engine. (SYNGEN) Smart Online’s proprietary SYNGEN automatically replicates and delivers the products and services our private label syndication partners want delivered to users of their web sites and bundles those products and services with the look and feel of their web sites. The SYNGEN thereby automates the process by which we integrate our products and services onto our partners’ web sites and allows each partner to select different groupings of products and services.
Our platform was developed using modular methodology, which allows various components to be assembled for rapid new application development and enhancement. In addition, all sensitive information is encrypted and stored in secured servers. All applications are operated from an environment with integrated security to protect against loss, misuse and data tampering. Secure Socket Layer technology protects data and provides security during transmission of sensitive financial data. The platform also integrates e-commerce services that can be customized based on the partner’s business model.
Customer Service. Smart Online offers customer and technical support M-F, 8:30 a.m. to 7 p.m. EST.
Next Generation Platform — OneBiz Conductor SM
We are currently developing a next generation platform, called OneBiz Conductor SM , which will make significant enhancements to our technology platform and add additional applications to our product offerings. We plan to accomplish this through a combination of internal development, joint development, licensing from other companies and acquisitions. We plan to introduce our next generation platform to the market in three installments beginning in the Fall of 2004 through the Fall of 2005. See “Next Generation Product Development — OneBiz Conductor SM .”
Current Products and Services
We provide a wide range of Internet-based software applications, content, data and services to and for small businesses. We also continue to sell some CD-ROM products. Our current products are organized in the following four categories:
Each of these categories is described below. We believe this wide range of applications, content, data and services provide us with a competitive advantage over our competitors in the small business market for companies with fewer than fifty employees. These are available to subscribers for a monthly subscription fee that allows unlimited use by one user at a time, except where noted below. Some products, identified below, are available to non-subscribers for one-time fees.
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Starting Business. Our Starting Business category of products and services include those related to:
Incorporation. We assist businesses to incorporate quickly and efficiently using Smart Incorporator and the services of our partner, Business Filings, a leader in providing incorporation services to small business owners. We provide information about the incorporation process and different types of business structures to allow small businesses to determine which structure is best for their business. Utilizing our services, small business subscribers can form a corporation, limited liability company, or nonprofit corporation in any of the 50 states. The process can take as little as 10 minutes. We provide our subscribers with 24-hour-a-day, seven days a week access to their accounts and important documents via our Online Corporate Center. Our subscribers can also obtain registered agent services in the state where their company is formed. We also sell subscribers personalized corporate or LLC kits, including corporate seal, stock certificates, stock transfer ledger, and sample forms, bylaws and minutes for both corporations and limited liability companies. Our subscribers can also order other services through us, such as Professional Corporation or LLC, S Corporation Election, Shelf Corporation, Foreign Qualifications and Federal Tax ID (EIN). We offer this service in connection with our partner, BizFilings, with which we share revenue.
Business Plans. Our Smart Business Plan software application is designed to ease the process of creating business plans to help entrepreneurs obtain the capital they require for their new or existing businesses. After answering a few simple questions, the user is ready to begin composing a full business plan — complete with financial tables and graphs. Smart Business Plan provides an easy-to-use interface and split screen design with complete guidance, instructions, and organization that provides even the most basic computer users with advanced functionality and planning capability. The application was designed for user collaboration as it allows users to share a plan with other registered users. By collaborating, users can get the assistance and feedback they need in a quick and timely fashion. After the user creates a business plan, it can be saved in a secure, private location for easy access from anywhere, at anytime. This application is part of our subscription package, but is also available to non-subscribers for a one-time fee.
Finance. Our subscribers can apply online for loans, lines of credit and SBA loans. Smart Online’s financing partners provides financing and approve or reject applications. We receive a referral fee from our financing partners for applications that are approved by our financing partners.
Market Research – US and Global. Our Smart Market Research software application is designed to assist users to research statistical information. Users can research and analyze U.S. or global demographic statistics. This application enables users to pinpoint statistical data from multiple markets to target the right customers, in the right locations. The U.S. database features information for U.S. regions, states, counties, and cities with populations of 25,000 or more. The Global Statistics database features demographic information and projections for most countries and areas of the world. Information included in the databases cover the following general topics: age, agriculture, ancestry, banking, business, construction, crime, education, federal government, housing, local government, Hispanic-origin, households, housing, labor force and employment, land area, manufactures, money income, personal income and earnings, earnings by industry, population, poverty, retail trade, service industries, veterans, vital statistics, and wholesale trade. The information is not owned by Smart Online and can be researched through sources other than Smart Online. Our value to users is that we have aggregated these databases in one location and we facilitate compilation and presentation of the search results. The results of market research inquiries are displayed in both table and graph formats online and can be downloaded to a user’s local hard drive for future reference. This application is part of our subscription package, but is also available to non-subscribers for a one-time fee.
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Self-Assessment of Strengths and Weaknesses. Our Smart Entrepreneur tool allows users to determine entrepreneurial strengths and weaknesses, and provides users with instant feedback to help gauge potential. After a user answers a series of detailed questions, Smart Entrepreneur provides an extensive report on the capabilities of the interviewee and provides helpful suggestions and hints for how to improve entrepreneurial strengths and maximize performance. Smart Entrepreneur also helps users determine how they will measure personal and business success, and understand how to overcome the obstacles between them and their goals. Users are encouraged to match their strengths with suggested strategies for business growth to increase the probability of succeeding with their business.
Protecting Business. Our Protecting Business category includes the following products and services:
Business and Legal Forms. Our Smart Legal Forms library is designed to automate and simplify legal communications, address everyday business and personal needs, minimize costly legal fees, and reduce the liability associated with running a business by providing easy-to-use interactive forms. This extensive collection of do-it-yourself legal forms is fully interactive, enabling users to select, preview, edit, and download over 2,000 forms online with minimal delay for composition and preparation. Smart Legal Forms’ professionally formatted documents include interactive forms in the following 16 categories: Loan and Credit, Business and Trade, Leasing, Buying and Selling of Goods, Construction, Human Resources, Corporate/LLC, Partnership/Joint Venture, Intellectual Property, Real Estate, Agency/Broker, Franchises, Personal and Family, Bankruptcy, Wills and Trusts, and other General Forms. This library is part of our monthly subscription package, but non-subscribers can also purchase forms for a one-time fee.
Intellectual Property. We explain about different kinds of intellectual property and provide links to search US databases for trademarks, patents and copyrights.
Government Forms. Our Smart Government Forms application is an electronic library of government statutory and legal forms, designed to make forms processing quick and easy by providing instant access to commonly used official forms. Use of forms is easy and fully automated, enabling users to complete the forms directly from their Web browsers, and e-mail, download, print, or share with others for collaboration. The completed documents with user’s input are saved in a secure private location for future access. This extensive library is continuously updated. Smart Government Forms includes official forms from the following agencies: Small Business Administration, Internal Revenue Service, U.S. Bankruptcy Court, Patent and Trademark Office, U.S. Copyright Office, Department of Housing and Urban Development, Export-Import Bank of the United States, Immigration and Naturalization, Customs and Border Protection, Bureau of Consular Affairs, Food and Drug Administration, Social Security Administration and Federal Emergency Management Agency. This library is part of our monthly subscription package, but non-subscribers can also purchase forms for a one-time fee.
Corporate Legal Guides. We provide information about corporations, partnerships and limited liability companies.
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Financial Guides. We provide information about: Creating Strategy, Goals and Objectives, Options to Fund a Business, SBA Financial Assistance Programs, Steps to Funding a Business, Venture Capital Firms, and Other Financial Resources.
Growing the Business. Our Growing the Business category includes the following products and services:
Marketing Plans. Our Smart Marketing Plan software application is designed to assist users to establish sales goals and identify the resources and programs required to meet those goals. After answering a small number of questions, the user can begin to establish marketing and revenue goals. Detailed instructions and examples are provided at every step to help the user create a clear, concise, well thought-out document. Users can further customize their plan by adding, removing, rearranging or changing the names of chapters and sections. The final product is a professional document that includes tables and colorful 3-D graphs, which can be used for strategic planning to increase revenue and to meet goals and objectives. The application was designed for user collaboration as it allows the user to share a plan with other registered users. By collaborating, users can get the assistance and feedback they need quickly. After a user creates a business plan, it will be saved in a secure, private location for easy access from anywhere, at any time. This application is part of our monthly subscription package, but is also available to non-subscribers for a one-time fee.
Landlord and Tenant Issues. Our Smart Rental software application is designed to allow users to protect their legal rights and increase efficiency when renting, leasing or managing real estate properties. Information is provided about landlord-tenant laws in each of the fifty states as well as Washington D.C., Puerto Rico, and the Virgin Islands. The application provides an overview of some of the highlights of landlord-tenant laws in each state and a summary of the states’ significant landlord-tenant codes, as well as the actual state codes. Information provided in this application enables users to understand and act on pertinent landlord-tenant issues. The easy-to-use and interactive design of this application simplifies the process of finding the relevant information. An extensive library of landlord-tenant forms and useful resources are also included.
Press Releases. Our Smart Press Release Writer software application is designed to simplify media relations. This professional writing service carefully crafts a fully customized press release that’s formatted ready for distribution. The Smart Press Release Writer covers press releases for 14 news categories. Users select a category and answer questions prompted by our software application. Professional writers at our partner, Reputations Inc., then write the press release. Users can review the press release and request changes. Both subscribers and non-subscribers pay a fee for this service. Fees are shared with our partner, Reputations, Inc., which performs the press release service for our customers.
Import/Export Information. Users can access the current U.S. trade database for over 220 countries, compiled from tariff and trade data by the U.S. International Trade Commission, including year-to-date data at all levels for both exports and imports.
Business Letter Forms. Our Smart Business Letters library is designed to automate and simplify business communications and correspondence. Smart Business Letters helps users create a paper trail for their business records, and assists in starting and building relationships with customers, suppliers, and investors. Smart Business Letters’ professionally formatted, easy-to-use interactive documents enable users to select, preview, edit, and download over 1,000 quality letters online. Users can save the completed forms in a secure private location for future reference, and access them from any web browser. The library of interactive letters includes localized letters for the United States, United Kingdom, Spain, and Germany, which take into account the different business practices of each country. This library is part of our monthly subscription package, but non-subscribers can also purchase forms for a one-time fee.
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Managing Operations. Our Managing Operations category includes the following products and services:
Employee Policies. Our Smart Policy Manual is designed to allow employers to quickly and easily build an entire employee policy manual or create individual policies. After an employer selects a company type and answers some general questions, a completed policy manual is created and can be downloaded and or published to the Internet. Complete customization is available for employers who have unique elements to their businesses or just want to add a more personal touch. This application will also allow collaboration with other registered users. By collaborating, employers can get the feedback and assistance they need in a timely fashion. Publishing the policy manual to the Internet allows employees to access it at anytime, anywhere, while allowing the employer the flexibility to update and maintain the manual. This application is part of our monthly subscription package, but is also available to non-subscribers for a one-time fee.
Research Databases . We provide users with the following:These allow our users to monitor key topics and company information with automatic daily email alerts and update notifications. Users can generate electronic newsletters and e-mails for their customer bases. Users can also publish business topics and reports directly on their web sites, complete with their company’s branding. These services are provided through our partner Net Content, with whom we share revenue.
Merchant Services. Smart Online and our partner, Moneris Solutions, provide credit card processing services. We share fees with Moneris Solutions.
Job Descriptions. We assist users to create professional job descriptions quickly and effortlessly. Our users can access a library of more than a thousand job descriptions complying with the latest Dictionary of Occupational Titles (DOT). Users can also preview job descriptions and postings online in HTML format, download them to their personal computers, or e-mail them to their colleagues.
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Instant Messaging Services. Our Smart Instant Messenger is private. All messages are encrypted end-to-end. All access is password protected so only authorized users are allowed on the network.
CD-ROM Products. Since our inception, we have distributed more than two million copies of CD-ROM products through a combination of direct sales, distributors and other means. Currently, our Business Plan and Legal Issues products are available online, as CD-ROMs and are loaded onto computers by some of our OEM partners. Approximately 1.88% of our revenue during 2002, and approximately 3.85% of our revenue during 2003, was from CD-ROM Products.
Next Generation Product Development – OneBiz Conductor SM
We are implementing an aggressive development, partnering and acquisition strategy to introduce the small business industry’s first comprehensive business resource center portal, to be called, OneBiz Conductor SM . This will improve our already robust modular platform. We plan to release OneBiz Conductor SM in three versions. We plan to introduce the first version to the market in the fourth quarter of 2004, the second version in Spring 2005 and the third version in Fall 2005.
We believe we will have a competitive advantage in the market, if our small business customers can access substantially all their management software applications and data online at the Smart Online web site and the web sites of our syndication partners. To move us toward that goal, OneBiz Conductor SM is being designed to provide users with:
Architecture. OneBiz Conductor’s core consists of the business services that provide common platform functionality like e-commerce, authentication, session management etc. At the heart of the core will be the Contextual Dynamic OneBiz Profile. A distinct profile will be created for every company using our Company Creation wizard when users signup and register. This feature is an enhancement of the functionality of our current proprietary technology platform. The profile will continually update itself based on operations performed and information requested by each company as it uses OneBiz. Business intelligence accumulated and deduced using this OneBiz profile will provide the platform with what we call “the state ” of each small business. Various OneBiz attributes are defined and inherited by the small business based on this “state.” This OneBiz profile also will provide varying role-based access to the platform based on security privileges assigned to each user by the business owner.
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The OneBiz profile will feature our expanded contextual business personalization and contextual advertising server engines that will change the characteristics of the OneBiz platform dynamically to meet the needs of each user without any human intervention. Examples of some behavioral patterns could be an automated GUI change, added features or an automated background action (for example: sending automated emails and reminders.)
OneBiz Conductor’s Business Process rules engine and the corresponding best business practices process rules and workflows will help users to realize significant cost reductions and efficiencies by automating business process flows, eliminating human intervention, and allowing small business applications to communicate and intelligently share information.
Our OneBiz Conductor SM platform is designed to be completely modular, with numerous plug-in connection points for existing and new functionality developed in-house or obtained through third-party partnerships and acquisitions.
Data exchange to and from each product or functional component will be handled seamlessly by the OneBiz integration platform. In addition, multiple users will be able to collaborate on the same function, application or document providing maximized workflow efficiencies. Finally, users will be able to work offline on various applications and later upload their work to OneBiz Conductor SM for synchronization.
New Functionality. OneBiz ConductorSM will focus on the following key categories of services:
Development Timeline. To achieve our goal of completing development of OneBiz Conductor SM by Fall 2005, we plan to release OneBiz Conductor SM in three versions with the first version scheduled for release in Fall 2004. Each release will have improved platform features and additional software applications.
OneBiz Conductor SM Version 1 , which we plan to introduce to the market in the fourth quarter of 2004, is expected to include:
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OneBiz Conductor SM Version 2 , which we plan to introduce to the market in Spring 2005, is expected to include:
OneBiz Conductor SM Version 3 , which we plan to introduce to the market in Fall 2005, is expected to include:
OneBiz Conductor SM may also include the following , if agreements can be reached with other companies to integrate these services into OneBiz Conductor SM :
Technology Platform License Revenue. Smart Online is in the process of determining whether its technology platform can become a licensable product for applications and content providers interested in creating their own syndication and online delivery business model. It is too early in our evaluation process to determine whether this will develop into another source of revenue.
Product Development Team. Our software engineering organization is responsible for developing our platform and new applications, as well as enhancing our existing platform and software. We believe that a technically skilled, quality-oriented, and highly productive software engineering organization is important for the success of new product offerings. We expect to increase our development team to meet our schedule for developing OneBiz Conductor SM . We may also use independent development firms or contractors to expand the capacity and technical expertise of our internal research and development team. Additionally, we may license from third parties or otherwise acquire technology that is incorporated into our products. We have a well-defined software development methodology that we believe allows us to deliver products that satisfy business needs and meet commercial quality expectations.
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Acquisitions from Outside Sources. We plan to engage in a targeted and strategically defined plan to acquire selected applications or businesses from unrelated third parties within the highly fragmented application service provider and software development industries. These transactions may include a combination of licenses from other companies, joint development and purchases. We expect that some of these licenses will be for our nonexclusive use.
We plan to add the following software applications through such third party transactions:
Because of many factors related to third party transactions are outside our control, we cannot predict whether or when these features will be added to OneBiz Conductor SM .
Following license or other acquisition of these applications, we will have to do integration work before we can offer these applications on our OneBiz Conductor SM platform.
Market
Small Business Market. We offer small businesses a wide range of software applications and other products and services that help owners start, run, protect and grow their small businesses. We define small businesses as companies with between one and fifty employees. According to the U.S. Small Business Administration ( www.sba.gov.aboutsba/sbastats.html ), in 2002 there were 22.9 million businesses with fewer than 50 employees. These companies employ approximately half of the nation’s workforce. According to market analyst Gartner Group ( Business Week , April 21, 2003) small and midsize companies worldwide were expected to spend $420 billion on technology in 2003. Only 25 percent have started taking advantage of SaS business applications.
International Data Corp. analysts ( Wall Street Journal , June 3, 2003) forecast that “worldwide spending on Web Services applications will reach $3 billion in 2003.” With expected growth of 25 to 35 percent per year, that number is expected to reach $4.5 billion in 2004 and $5 billion in 2005.
Market Resources. We spent $9,766 during 2002 and $3,167 during 2003 on advertising. During 2004, we have increased our budget for sales and marketing, including hiring additional people. Smart Online markets and sells its products directly to small businesses through its www.smartonline.com web site, through private label syndication partnerships with major corporations and financial institutions and through OEM relationships. No single customer or partner accounted for more than 10% of our total revenue during 2002 or 28% during 2003. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes to Financial Statements for discussion of our major customers.
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Web Services Sales. Small businesses often cease operating or are sold. In other cases, their needs change. We must constantly recruit new subscribers to replace existing subscribers. We engage in a variety of marketing activities directed to small businesses, including e-mail and direct mail campaigns, co-marketing strategies designed to leverage existing strategic relationships, public relations campaigns, speaking engagements and forums, and industry analyst visibility initiatives. Web Services sales to small businesses, amounted to approximately 17% of our revenue during 2002 and approximately 16.5% during 2003.
Subscriptions, Customer Orders and Accounts Receivable. We typically do not have a backlog of customer orders as our services are delivered instantaneously over the Internet. Substantially of our small business customers pay via credit cards. We typically offer new subscribers an initial period of free subscription service. Our subscribers can cancel their subscriptions at any time without penalty.
Syndication Partners. We private-label and customize our platform for our syndication partners. This enables them to provide their own web site users with our resources and applications. The motivation of our syndication partners is to acquire and retain small business customers. Companies that utilize private-label Smart Online products and services include: Bank One, NCB Capital, a Division of National Cooperative Bank (NCB), Union Bank of California, Gruner + Jahr USA for Inc. and FastCompany magazines Cole Taylor Bank of Chicago. Our syndication partner agreements have initial terms ranging for periods of up to five years.
We currently rely upon direct marketing to major corporations to establish private label syndication and marketing partnerships. Our sales efforts to syndication, integration and OEM partners involves contact with multiple decision makers, frequently including the prospective customer’s officer level personnel. While the average sales cycle varies substantially, it has generally ranged from two to six months. These partners promote the Smart Online product line through a variety of marketing communications vehicles, including advertising and special promotions.
Revenue from our private label syndication amounted to approximately 14.5% of our total revenue in 2002 and approximately 9.2% in 2003.
Our contracts with certain syndication partners and integration partners terminated earlier than originally contemplated in the contracts with these partners. Revenues from small businesses using our website and the websites of our current and former syndication partners and integration partners have been insignificant to date. To maintain existing relationships and attract new relationships, we must generate substantially greater revenue from small businesses. See “Marketing Strategy” below for our plan to achieve this.
We believe large companies, who desire to acquire and retain small business customers, represent a significant market opportunity for us. We intend to expand our syndication channel to include partners in the financial services/banking, media and broadcasting, telecommunications, insurance and real estate markets.
OEM Sales. Our distributor, PC Treasures, sells some of our CD-ROM products to Dell Computers and Gateway, which bundle our products with some of their computers on an OEM basis. We believe the primary value of our OEM relationships is to help develop our brand name to generate sales of our web-based products. MYOB OEMs our products for sale in Australia and New Zealand.
Product Pricing. Price is an important factor in the small business market. Our pricing model allows customers to purchase use of substantially all our applications for a monthly subscription fee that provides unlimited usage for one user at a time. Certain applications, such as business planning, market research and planning, employment policies and government forms, are also available to non-subscribers, for a flat fee. Monthly subscription rates for new subscribers direct through www.smartonline.com , are typically $29.95 per month after a free trial period. We generally receive lower fees from some of our long-term subscribers and from subscribers at the private label syndication web sites of our partners. We share revenue with our syndication partners. We realize revenue from license fees to syndication partners, which is usually paid in a lump sum at the beginning of the relationship. By integrating third-party products onto our web site, such as the press release, loan referral, incorporation services and merchant services, we share revenue from sales of third party services. We also realize revenue from OEM deals by our distributor, PC Treasures, with manufacturers, such as Dell Computer and Gateway, for which we receive nominal payments for copies of our CD-ROM products bundled with computers.
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Future Possible Revenue Streams. We plan to seek to generate additional streams of revenue from international operations, licensing our technology platform and selling advertising. Of these, we have invested most in preparing for international operations.
Contract Terms. A significant portion of revenue from syndication contracts is received upfront with monthly maintenance payments. Customers typically have the right to terminate their contracts for cause, if we fail to perform. We generally invoice our syndication customers in annual or monthly installments and typical payment terms provide that our customers pay us within 30 days of invoice. In general, we collect our billings in advance of the service period.
Smart Online Europe Penetration Plan
We currently generate no revenue from international operations, although we currently operate a free web site www.SmartOnline.co.UK for users in Great Britain. We are conducting test marketing in the United Kingdom and France, but we have not yet commercially launched in either country. We had previously launched a French web site, but terminated commercial operations in 2002 as part of our cost cutting efforts. Smart Online has localized its platform and applications for the United Kingdom (we estimate it is 80 percent complete) and we are a licensed provider of U.K. governmental forms. We do not, however, have a projected launch date for our UK web site, because we are focusing our development resources on our OneBiz Conductor SM platform launch. Localizations for Germany, Spain and France are approximately 20-30 percent complete.
As we have done in the U.S., Smart Online plans to seek syndication and channel partners in Europe to more quickly and cost-effectively reach the large and diverse small business market segments in each of the targeted countries.
Smart Online is currently in discussion to develop syndication partnerships with several large small business enterprise community/information portal owners in The Netherlands.
Challenges to Marketing in Europe. There are numerous challenges for a U.S.-based company moving into European markets. These include:
Key Factors to Entering the European Markets. In general, our European business development will be focusing on the following major tasks:
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Packaging Smart Online for Different Countries and Partners. We plan to offer a modular or slimmed-down version of Smart Online in European countries with fewer applications than the U.S. web site. The Smart Online platform will be repackaged as appropriate for each country or channel partner and may include only a few applications. After we hire sales associates for each country, their input will assist Smart Online in determining the “package” that will be promoted and sold in each country.
Other International Operations . Smart Online currently has a distribution licensing agreement with MYOB Ltd., for sales of two of its shrink-wrap products in Australia and New Zealand. According to the three-year contract signed in 2003, MYOB will share 15 percent of gross sales of these products with Smart Online. If MYOB recruits syndication partners using the online versions of these two products, MYOB is required to pay us 50 percent of syndication fees. Smart Online and MYOB are currently in litigation. Refer to Description of Business-Legal Proceedings.
Marketing Strategy
Since 1993, Smart Online has distributed over two million copies of our CD-ROM based product. Since 2000, we have had more than 500,000 registered users of our Web Services, although the number of active users at any one time varies and is substantially lower.
Web-based products are distributed through www.SmartOnline.com and its companion United Kingdom web site, as well as through the web sites of our syndication partners discussed below. CD-ROM based products are sold directly to customers by Smart Online, but most CD-ROM based products are distributed through OEM relationships. For example, through our distributor PCsTreasures, Dell Computer packages Smart Online CD-ROM products with some of its computers.
Although Smart Online has generated revenue from both our web-based and CD-ROM products, to date Smart Online has focused primarily on developing our web-based products, distributing a large number of CD-ROMs and free promotional codes to use our web-based products, testing and validating our technology infrastructure to prepare to accommodate a high volume of simultaneous users, and evaluating user feedback. Only $3,167 was spent on advertising in 2003.
Our primary marketing strategy to date has been price-based promotions, which gains us users, but limits our revenue. For example, CD-ROM products are provided to OEMs for a nominal charge. In addition, Smart Online has permitted many customers to use its web-based products for free, either by offering free initial service or by allowing users that fail to pay our monthly subscription fees to continue to access our web-based products.
Our strategy in the past has been to trade revenue opportunities for the opportunity to learn from our small business customers what features are most important for their businesses, while at the same time building a leads database consisting of users of our web-based products and persons to whom CD-ROM products have been distributed.
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We believe now is the appropriate time to begin to generate greater revenue from our technology, content, customer preference knowledge and database of current and past users.
Our plan is to generate greater revenue through a combination of two factors: greater marketing and sales efforts and introducing new products of greater value to small businesses.
Higher Value New Products. Our next generation platform, OneBiz Conductor SM , is the key to adding higher value products. Based on our experience with small businesses, we believe accounting software is the critical application most small businesses must have. We plan to add accounting software and sales automation software to our product offerings as we roll out OneBiz Conductor SM from the Fall of 2004 to the Fall of 2005, together with the new dashboard features of OneBiz Conductor SM described elsewhere. We believe that when these applications and features are available, we will greatly increase the value proposition of our web-based products to small businesses. This additional value will then justify our allocating greater resources to sales and marketing.
Greater Marketing and Sales Efforts. We plan to increase our sales force from one person in 2003, to between 15 and 20 people in 2005. This increase will be timed to coincide with the rollout of our next generation platform, OneBiz Conductor SM , described above. We will utilize these additional resources for a number of sales and marketing initiatives, but we plan to emphasize contacting people who currently utilize our internet-based products through our web sites and the web sites of our syndication partners. Soon after contacting non-paying customers, we plan to cut off access to OneBiz Conductor SM for users who fail to pay for service. At the same time, we will begin to contact people who have our CD-ROM products to convince them to upgrade to become subscribers to our OneBiz Conductor SM product. We expect the success of our sales efforts to people already familiar with our current web-based and CD-ROM products will depend upon the additional value provided to small businesses by OneBiz Conductor SM , particularly the planned new accounting software and sales automation applications and dash board capabilities.
We believe these factors will enable us to leverage our current and new assets to generate greater revenue from existing users and to add new paying customers as we shift people from whom we currently generate no revenue or nominal revenue to paying customers.
Competition
The market for small business software applications is highly competitive and subject to rapid change. The direct competition we face depends on the market segment focus and delivery model capabilities of our competitors. We also face indirect competition from potential customers’ internal development efforts and, at times, we have to overcome their reluctance to move away from existing paper-based systems.
Our principal direct competition comes from several large vendors of Internet-based software for small businesses that sell many products similar to ours. Most of these competitors also sell other products and services not specifically targeted to small businesses. These competitors include, but are not limited to, Microsoft, Oracle, Intuit, SAP and Yahoo. We also expect to face competition from new entrants that do not already market products similar to ours.
We have set forth below the primary competitive factors on which we believe small businesses of fifty or fewer employees make their information technology purchasing decisions and our opinion of how we meet each of these competitive factors compared to most of our competitors.
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We expect competitors will seek to offer products with similar features to Smart Online. Since we have no patents, we are unable to prevent this. We believe the key barrier competitors will face in trying to develop competing products that provide small businesses with quality equivalent to our products is that we have developed products utilizing our more than ten years of experience addressing the needs of the many small business users of our CD-ROMs and Internet based products. During this time, we have learned by trial and error what works and what doesn’t work for small businesses. We have incorporated into our products the feedback of our small business customers. We believe this specialization on small businesses has been a key factor in our ability to attract syndication partners. One advantage of providing Internet-based services is that we can monitor customer usage and determine what works and what doesn’t work by the volume of usage. We do not have to wait for customer complaints to identify areas for improvements. We believe that competitors who serve personal users and larger businesses are likely to experience difficulty designing products that match the utility of our products, which we specifically designed for small businesses with 50 or fewer employees.
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We note that there are many definitions of small business. Some of our competitors categorize businesses with up to 50 employees as “small businesses” and develop products that meet the needs of such larger small businesses. We believe our exclusive devotion to companies with 50 or fewer employees is a competitive advantage in developing products that meet the needs of this sector of the market.
Although we believe we offer highly competitive services and software, many of our competitors have longer operating histories, greater financial, technical, marketing, and other resources, greater name recognition, and a larger number of total customers for their products and services. Moreover, a number of our competitors, particularly Microsoft, Intuit, Oracle and Yahoo sell many products to our current and potential customers, as well as to systems integrators and other vendors and service providers. In addition, these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their products, than we can. It is also possible that new competitors or alliances among competitors or other third parties may emerge and rapidly acquire market share. Increased competition may result in price reductions, reduced gross margins, and change in market share, any of which could harm our business.
Intellectual Property Rights
Our success depends, in part, upon our proprietary technology, processes, trade secrets, and other proprietary information, and our ability to protect this information from unauthorized disclosure and use. We rely on a combination of copyright, trade secret, and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. We have registered trademarks and registered service marks on more than a dozen products and data services with other applications for registered trademarks pending. As part of our efforts to protect our proprietary information, we enter into license agreements with our customers and nondisclosure agreements with certain of our employees, consultants and corporate partners. These agreements generally contain restrictions on disclosure, use, and transfer of our proprietary information. We also employ various physical security measures to protect our software source codes, technology, and other proprietary information. Currently, we do not own any issued patents nor have any patent applications pending.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology that we consider proprietary, and third parties may attempt to develop similar technology independently. Policing unauthorized use of our products is difficult, particularly because the global nature of the Internet makes it difficult to control the ultimate destination or security of software or other data transmitted. While we are unable to determine the extent to which piracy of our software products exists, we believe software piracy is a persistent problem. In addition, effective protection of intellectual property rights may be unavailable or limited in certain countries. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws in the United States.
In addition, over the past several years, we have made numerous changes in our product names. Although we own registered trademarks in the United States and have filed trademark applications in the United States and in certain other countries, we do not have assurance that our strategy with respect to our trademark portfolio will prove adequate to secure all necessary intellectual property rights or to protect us from claims by third parties, either domestically or in foreign countries. There also can be no assurance that any of our copyrights or trademarks will not be challenged and invalidated.
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While we are not aware that our products, trademarks, copyrights, or other proprietary rights infringe the proprietary rights of third parties, third parties may assert infringement claims against us in the future with respect to current or future products. Further, we expect that we may become subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. From time to time, we hire employees and retain consultants who have worked for independent software vendors or other companies developing products similar to those offered by us. Such vendors or companies may claim that our products are based on their products and that we have misappropriated their intellectual property. Any such claims, with or without merit, could cause a significant diversion of management attention, result in costly and protracted litigation, cause product shipment delays or require us to enter into royalty or licensing agreements with third parties. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which would have a material adverse effect upon our business and financial position.
Employees
As of September 1, 2004, we had 17 full-time employees. We plan to expand our staff to add additional employees in software development, sales and marketing and internal auditing and accounting. No employees are known by us to be represented by a collective bargaining agreement, and we have never experienced a strike or similar work stoppage. We consider our relations with our employees to be good. At June 30, 2004 we owed approximately $1,180,000 to our employees. See "Note 5 of Notes to Financial Statements."
Properties
Our principal administrative, sales, marketing, and research and development facility is located in Durham, North Carolina near Research Triangle Park and consists of approximately 3,000 square feet of office space held under a lease that expire on October 31, 2004. Management intends to renew the lease for at least one more year.
Legal Proceedings
Smart Online v. Siebel, et al. – Smart Online instituted this action against OpenSite Technology, Inc., Siebel Systems, Inc., Kip Frey, and Steve Goldsmith on August 7, 2001, in Superior Court, Wake County, North Carolina (Case No. 01-CVS-09604). The case arises out of Smart Online’s purchase of OpenSite Technology’s auction software, which Smart Online claims is defective, and from certain representations OpenSite Technologies made about the software, which Smart Online alleges were false. The case was designated as a complex business case and assigned to the North Carolina Business Court. Smart Online brought claims for relief against the Defendants for breach of contract, breach of express warranty, civil conspiracy, unfair and deceptive trade practices, negligent misrepresentation, fraud, and rescission. Smart Online is seeking to recover both actual and punitive damages. There are no counterclaims or cross claims in this action. Fact discovery is complete. Trial is set for October 7, 2004.
U.S. News & World Report v. Smart Online, Inc. – U.S. News instituted this action against Smart Online in January 2003 in New York (Case No. 102959/03) for breach of contract, due to Smart Online’s refusal to pay the sum of $92,204.17 for an advertising insert, which Smart Online asserts was faulty. On October 27, 2003, the New York action was dismissed by the Supreme Court of the State of New York, because the State of New York had no jurisdiction over this suit. On February 6, 2004, U.S. News filed a similar claim in the District Court of Durham County, North Carolina (Case No. 04-CVD-00575). On April 9, 2004, Smart Online filed its answer to U.S. News’ claim, together with counterclaims for breach of contract and a motion to transfer the case to the Superior Court division. Plaintiff filed its reply to Smart Online’s counterclaims. As a result of the July 12, 2004 hearing, Smart Online’s motion to transfer the case to Superior Court was granted. Neither party has yet served discovery and no trial date has been set.
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Infopia, Inc. v. Smart Online, Inc. – Infopia instituted this action against Smart Online on August 6, 2003 in District Court, Wake County, North Carolina (Case No. 03-CVD-10567) for breach of contract, unfair and deceptive trade practices, and punitive damages, alleging that Smart Online improperly refused to refund the $32,500 integration fee paid by Infopia to Smart Online for Smart Online’s integration of Infopia’s products into Smart Online’s platform. Smart Online answered the complaint on October 31, 2003, and denied all claims for relief. Smart Online also filed a counterclaim for breach of contract against Infopia for Infopia’s failure to pay Smart Online certain sums it was due under the revenue sharing plan set forth in the contract between the parties. Smart Online believes plaintiff’s claims for unfair and deceptive trade practice and punitive damages are without merit. The case is currently in the fact discovery phase. No trial date has been set.
Smart Online, Inc. v. Genuity, Inc. – Smart Online instituted this action against Genuity on May 22, 2001, in the Superior Court of Wake County, North Carolina, Civil Action No. 01-CVS-06277. Smart Online brought claims against Genuity for breached of contract, breach of express warranty, breach of implied warranty of merchantability, breach of warranty of fitness for a particular purpose, conversion, unfair and deceptive trade practices, negligent misrepresentation and fraud arising from Genuity’s failure to perform properly under contracts between the parties, from Genuity’s failure to return certain property belonging to Smart Online, and from certain representations made by Genuity with regard to the services needed by Smart Online under the contracts. On or about July 23, 2001, Genuity files its answer to the complaint along with counterclaims against Smart Online. In its counterclaims, Genuity brought claims for breach of contract alleging that Smart Online failed to pay for the services rendered by Genuity. On October 22, 2002, the court denied Defendant’s request to dismiss Smart Online’s breach of contract claim, allowed Smart Online to amend its complaint to restate its claim for breach of contract, and dismissed Smart Online’s claims for breach of implied warranties. The parties were completing discovery and preparing for trial when the case was automatically stayed as a result of Genuity’s filing for bankruptcy. This case is still subject to the automatic stay.
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MANAGEMENT
’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes that appear in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”
Overview
Smart Online develops and markets Internet-delivered or Software-as-Services (SaS) software applications and data resources to start, run, protect, and grow small businesses. Since 2000, we have had more than 500,000 registered users of our web-based products, although the number of users at any time is substantially lower. More than 900,000 copies of our software have been distributed through OEM deals with major computer manufacturers. We have distributed more than 700,000 copies of our CD-ROM based products. In addition, we reach millions of other small businesses through private-label syndication arrangements with large corporations that private-label the Smart Online offering through their corporate web sites. Our syndication relationships provide a cost- and time-efficient way to market to the extremely large and diverse small business sector.
Smart Online has developed numerous sources of revenue as its business plan has changed to adapt to changing business circumstances. These sources of revenue include syndication partners, integration partners, OEMs, subscriptions from small businesses, one-time purchases by small businesses and barter transactions with media companies. Currently, each of these revenue streams is small. Our business plan is designed to utilize existing and future relationships in each revenue source to ratchet up the amount of revenue we derive from all sources. We have described in this prospectus the key elements of how we plan to achieve this.
Incorporated in Delaware in 1993, Smart Online pioneered the market for small business software applications. Our initial offerings were sold as shrink-wrapped products through major retail chains such as Staples, Office Depot and Egghead Software. Since inception, we have distributed over two million copies of CD-ROM based products through direct sales, distributors, and other channels. Since 2000, our products have been primarily offered through an Internet-based platform. Smart Online also pioneered the syndication or private-label distribution model to more efficiently and effectively reach the large and diverse small business sector. Market analyst firm Summit Strategies says, “Smart Online’s proprietary distribution platform enables the vendor to quickly customize for and integrate with its partners’ services, making their joint services accessible to customers via a single sign-on.”
Smart Online is currently developing the next generation of its services portal, called OneBiz Conductor SM , which will include significant enhancements to the technology platform and add additional applications to our product offerings. We plan to accomplish this through a combination of internal development, joint development, licensing from other companies, and acquisitions. We plan to release OneBiz Conductor SM in three versions beginning in the fourth quarter of 2004.
Our objective is to be a leading provider of on-demand business software application services for small businesses. To address the significant market opportunity, our management team is focused on a number of short and long-term challenges, including strengthening and extending our service offerings, converting our registered users to paying customers and expanding our sales efforts by focusing on the specific need of our customers. Since 2000, Smart Online’s major focus has been on developing and validating our online content, applications, services, delivery platform and user interface. To validate the platform, services, and products, many customers received access to the Smart Online products and portal free-of-charge in exchange for their evaluation and feedback. We have also used a number of different marketing approaches to test and validate the best techniques to acquire and retain small business customers.
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With this validation and analysis nearly complete, we intend to increase our focus on revenue generation. Smart Online has recently hired key executives and begun targeted programs to market and sell the Smart Online offerings. These efforts are targeted to direct customer acquisition and retention, recovery of former customers and closing on new syndication partnerships.
Smart Online’s revenues were $1.39 million in 2002 and $1.26 million in 2003. At December 31, 2003 Smart Online had deferred revenue of approximately $948,000. In the first six month of 2004, Smart Online entered into several new syndication and integration agreements totaling $665,000, including $540,000 of barter transactions. We are planning to substantially increase our advertising and marketing in future years. We have started to enter into new syndication partnerships that target strategic partners for bartering arrangements for advertising and joint marketing programs to take advantage of discounted advertising rates and to provide an opportunity for back-end revenue sharing. We began targeting small business media companies during the first quarter of 2004, such as Inc. Magazine, BusinessWeek Magazine, NY Report Magazine and FastCompany Magazine, who have small-business customer bases. Smart Online anticipates the revenue capabilities from its back-end revenue share arrangements with the media companies will enable it to increase web services revenue for both Smart Online and its private label syndication partners. We expect to create these arrangements in the future with media companies who offer the ability to reach small-business customers and assist in off-setting Smart Online’s cash expenditures for print and online advertising and marketing. While we intend to derive a majority of our syndication revenue from traditional non-barter transactions, we will evaluate barter transactions on a case-by-case basis when we believe such transactions make economic or strategic sense. Pursuant to the requirements of Emerging Issues Task Force (EITF) No. 93-11, “Accounting for Barter Transactions Involving Barter Credits,” for the six-month period ended June 30, 2004, Smart Online recognized only approximately $68,000 of barter revenue.
To increase our revenues and take advantage of our market opportunity, we will need to add substantial numbers of paying subscribers. We define paying subscriptions as unique user accounts. We plan to re-invest earnings for the foreseeable future in the following ways: hiring additional personnel, particularly in marketing and sales; expanding marketing and sales activities; increasing our research and development activities to upgrade and extend our service offerings and to develop new services and technologies; adding to our infrastructure to support our growth; and formalizing our operational and financial systems to manage a growing business. Worldwide growth of software subscriptions will outstrip perpetual licenses, according to IDC, a leading global market intelligence and advisory firm in the information technology and telecommunications industries that provides local expertise and insights on technology markets in the US and 50 other countries, “Subscription licensing will grow at 16.6%, compounded, from 2004 to 2008 while perpetual licenses will experience negative growth of three-tenths of one percent in that time frame. By 2008, subscription license revenues will hit $43 billion worldwide, or 34% of the total software market.”
IDC analyst Amy Konary says that “the traditional license model is too costly and complex to be viable. Jason Maynard of Merrill Lynch (NYSE: MER — news — people ) is such a believer that in April 2004 he launched an on-demand index to help investors track and understand the shift. Several major companies sell at least some products by subscription, including Microsoft (Nasdaq: MSFT — news — people ), Symantec (NASDAQ: SYMC — news – people,) BMC Software (NYSE: BMC — news — people ) and Macrovision (NASDAQ: MVSN — news — people .)There are a few companies that sell this way exclusively, Salesforce.com (NYSE: CRM — news — people ), and NetSuite .
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We expect marketing and sales costs, which included third-party advertising and marketing expenses of approximately $16,000 and $78,000 for 2003 and the six months ended June 30, 2004, respectively, to increase substantially in dollars and as a percent of total expenses in the future as we seek to add and manage more paying subscribers, build brand awareness and increase the number of marketing and sales programs implemented.
Fiscal Year
Our fiscal year ends on December 31. References to fiscal 2004, for example, refer to the fiscal year ended December 31, 2004.
Sources of Revenue
Smart Online currently derives revenues from the following sources:
Syndication Fees – fees consisting of:
Fees charged to syndication partners to create a customized private-label site.
Revenue sharing fees. Syndication partners typically charge their customers a monthly fee to access the private-label site. In most cases, Smart Online receives a percentage of these fees.
Integration Fees – fees charged to partners to integrate their products into the Smart Online syndication platform. Integrating third-party content and products has been a key component of Smart Online’s strategy to continuously expand and enhance its platform offered to syndication partners and its own customers base.
Web Services fees – comprised of the following:
E-commerce sales directly to end-users:
Subscription
A la carte
E-commerce revenue sharing with integration partners
Hosting and maintenance fees
E-commerce Website Design and Build
Loan origination fees
Online marketing to our syndication/integration partners
OEM agreements with third-party computer manufacturers for various individual Smart Online applications.
Other Revenues – Includes revenues generated from consulting fees and the sale of legacy shrink-wrapped products.
Smart Online also plans to seek new sources of revenue, including the following sources:
Technology Platform Licensing Revenue – We plan to seek to generate revenue from licensing our technology platform.
Advertising Revenue – We plan to add advertising revenue in the future.
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During the first six months of 2004, we entered into new syndication and integration partnerships with targeted strategic partners that included bartering arrangements for advertising and joint marketing programs to take advantage of discounted advertising rates and to provide an opportunity for back-end revenue sharing. These new partnerships extend Smart Online’s reach to more than 4 million new small business prospects. Smart Online embarked on this program based on the success of the revenue share strategy, illustrated by Google, Overture, and Career Builder, where media companies provide these services to their customers to increase revenue for both companies. Smart Online began targeting small business media companies during the first quarter of 2004, such as Inc. Magazine, BusinessWeek Magazine, NY Report Magazine and FastCompany Magazine, who have small business customer bases. Smart Online estimates the revenue capabilities from its back-end revenue share arrangements with the media companies will enable it to increase web services revenue for both Smart Online and its Private Label Syndication partners while creating another barrier to entry for potential competitors. Smart Online expects to create certain types of these arrangements in the future with media companies who offer the ability to reach small business customers and will assist in off-setting Smart Online’s outlay of cash for less costly print and online Advertising and Marketing. While we intend to derive a majority of its Syndication revenue from traditional non-barter transactions, we will evaluate barter transactions on a case-by-case basis when we believe such transactions make economic or strategic sense. During 2004, Smart Online signed syndication contracts with Inc. Magazine and FastCompany Magazine. In addition, we are embarking on a telesales effort to up sell current users to additional Smart Online services and to bring former users back to Smart Online.
Both syndication and integration fees are recognized on a monthly basis over the life of the contract, although a significant portion of the fee from integration is received upfront. The typical syndication and support term is 12 to 36 months. Our contract and support contracts are noncancelable, though customers typically have the right to terminate their contracts for cause if we fail to perform. We generally invoice our customers in annual or monthly installments and typical payment terms provide that our customers pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue depending on whether the revenue recognition criteria have been met. In general, we collect our billings in advance of the service period. Online marketing, which consists of marketing services provided to our integration and syndication partners have in the past generated additional revenue. In addition, certain users have requested that Smart Online implement online marketing initiatives for them, such as promoting their products through Google or Overture services. Online marketing has not been a material source of past income. We intend to see an increase in the level of online marketing services in the future.
Web Services revenues are comprised of e-commerce sales directly to end-users, hosting and maintenance fees, e-commerce website design fees and online loan origination fees. E-commerce sales are made either on a subscription or a la carte basis. Subscription, which is access to most Smart Online offering is payable in advance on a monthly basis and is targeted at small companies or divisions of large companies. We will see to grow our its monthly subscription volume dramatically over the next 24 months as new versions of Smart Online’s platforms (OneBiz Conductor SM ) are released. We expect monthly subscription fees will typically be $29.95, although to date we have given free access to our web services to may users. A la carte pricing, which allows customers to purchase one-time use of a specific software or content service, ranges from $10 to $300, which can include third-party charges when applicable, such as state and federal fees associated with incorporating a business or additional fees associated with having a press release written and revised.
Additionally, Smart Online receives a portion of third-party sales of products and services through revenue sharing arrangements, which involves a split of realized revenues. Hosting and maintenance fees are charged for supporting and maintaining the private-label portal and providing customer and technical support directly to our syndication partner’s users and are recognized on a monthly basis. E-commerce website design fees which are charged for building and maintaining corporate websites or to add the capability for e-commerce transactions, are recognized over the life of the project. We have discontinued our third-party arrangement for online web design. We expect to resume this service after a new partner is under contract. Online loan origination fees are charged to provide users online financing option by which Smart Online receives payments for loan or credit provided. We intend to become more aggressive about promoting this line item in the future.
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Technology Platform License Revenue: Smart Online is in the process of determining whether its technology platform can become a licensable product for applications and content providers interested in creating their own syndication and online delivery business model. It is too early in our evaluation process to determine whether this will develop into another source of revenue.
Revenues from OEM arrangements are reported and paid to Smart Online on a quarterly basis based on actual sales, subject to certain contractual minimum volumes.
Other revenues consist primarily of traditional shrink-wrap sales, which are not a core revenue source for Smart Online. We expect that consulting fees, which in the past have generated significant revenues, will not be a material revenue source in the future.
Revenue From Related Parties
Approximately 27.2% of total revenues for the year ended December 31, 2003 and 31.3% of total revenues for the six-months ended June 30, 2004, were from a single customer, Smart IL Ltd. (“SIL”), formerly known as Smart Revenue Europe Ltd., an Israeli based software company specialized in secured instant messaging products. During March 2004 SIL ceased further development of its technology and laid-off all employees. Smart Online continues to support the integration with SIL’s products for future potential distribution, with the current integration agreement running through the end of 2004. As of June 30, 2004, Smart Online had approximately $157,000 of deferred revenue related to SIL that will be recognized over the remainder of 2004 pursuant to its revenue recognition policies and the terms of the integration agreement. SIL is owned by a shareholder of Smart Online.
On August 13, 2002, Smart Online entered into an integration agreement with SIL to incorporate its products into Smart Online’s platform. As part of this agreement, SIL paid $300,000 for such integration, and the parties agreed to share future revenues generated from the sales of the products. On August 30, 2002, the parties signed an amendment to the original agreement, in order for Smart Online to provide SIL certain co-development services, which includes instant messenger and video conferencing. In exchange, SIL paid Smart Online an additional $300,000. The parties further agreed that the products developed as a result of both companies’ efforts will be owned by both parties. On April 30, 2003, Smart Online and SIL signed a new amendment and restated the integration program agreement. According to this new amendment and restated agreement, Smart Online agreed to fund the future development of the products. In exchange SIL agreed to limit future amounts payable by Smart Online under the original share revenue agreement to $1.7 million.
In addition to the agreements described above, on August 30, 2002, Smart Online and SIL also entered into a reseller agreement whereby SIL paid Smart Online $200,000 for the right to distribute Smart Online’s products in the territories of Israel, United Kingdom, France, Italy, Netherlands, and Spain, in exchange for Smart Online’s marketing support and a twenty percent commission from the gross sales generated by SIL. On March 17 and 27, 2003, the parties subsequently modified the original re-seller agreement to restrict the territory to only Israel and Netherlands. Additionally, on December 22, 2003, Smart Online signed a private label syndication agreement with SIL to provide website development for SIL website.
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Smart Online paid $3,300 to SIL for moving expenses with regard to the SIL development team visiting Smart Online from Israel in January of 2003. Smart Online also paid SIL $25,000 as a reseller payment for the Moneris Integration contract they secured pursuant to their re-seller agreement in May of 2003. Smart Online also paid SIL $90,000 pursuant to their contract dated December 20, 2003 for technical co-development work, which includes instant messenger and video conferencing, on a monthly payment of $15,000 starting in December of 2003 and ending in May of 2004.
During 2003, Smart Online provided $20,200 in consulting services to Small Business Lending Institute, Inc. (“SBLI”). This constituted approximately 1.6% of Smart Online’s revenue during 2003. Tamir Sagie, an officer of Smart Online, is an officer of SBLI. Michael Nouri, the Chief Executive Officer of Smart Online is a shareholder in SBLI. Smart Online paid $221,517 to SBLI during the first six months of 2004, because SBLI paid Smart Online’s employees during the first quarter of 2004 while Smart Online was dealing with a tax matter with the Internal Revenue Service. The temporary transfer of Smart Online's employees to SBLI allowed Smart Online to obtain a clean cut off to determine the extent of the tax matter.
Approximately 11.9% of total revenues for the year ended December 31, 2003 was from a third related company, Parson and Shearson, Inc., which is owned 50% by the CEO of Smart Online, Michael Nouri, and 50% by his brother Eric Nouri. This revenue related to services performed by Smart Online for the development of web-based human resources and inventory applications for Parson and Shearson. Parson and Shearson has paid in full for all services and has no outstanding amounts payable to Smart Online.
Accordingly, approximately 40.3% of year 2003 revenue, and approximately 31.3% of revenue for the first six months of 2004 were derived from three related parties, SIL, Parson and Shearson, Inc. and SBLI. Smart Online expects revenue from related parties will not continue to be a significant part of Smart Online’s revenue. If Smart Online fails to replace revenue from related parties with revenue from unrelated parties, Smart Online’s revenue will decrease.
Cost of Revenues
Cost of Revenues . To date Smart Online has not capitalized any costs associated with the development of its products and platform. Smart Online has not capitalized any direct or allocated overhead associated with the development of software products prior to general release. SFAS No. 86, Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs related to software development incurred between completion of the working model and the point at which the product is ready for general release have been insignificant.
Operating Expenses
During 2002 and 2003 our efforts were primarily focused on product development and integration. During the first quarter of 2002, we substantially reduced the number of people we employed. As a result, Smart Online employed approximately 13 full-time equivalent employees each year. Most employees performed multiple functions. As a result, we have managed the organization as a single operating unit rather than dividing it into functional areas such as general and administrative expenses, sales and marketing expenses, and development.
Research and Development . We have historically focused our research and development activities on increasing the functionality and enhancing the ease of use of our on-demand application service. Because of our proprietary, scalable and secure multi-user architecture, we are able to provide all customers with a service based on a single version of our application. As a result, we do not have to maintain multiple versions, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in the future, research and development expenses will increase substantially in absolute dollars as we upgrade and extend our service offerings and develop new technologies. We expect this to be particularly true during 2004 and 2005 as we incur expenses to develop our next generation platform One Biz Conductor SM .
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Marketing and Sales . During 2002 and 2003, non-staff related marketing, advertising, and public relations expenses totaled less than 3% of sales. We have increased this budget during 2004 and expect this trend to continue as we strive to grow our revenue. Smart Online has also embarked on an effort to develop programs similar to marketing efforts by Google, Overture, and Career Builder where media companies provide Smart Online’s Private Label Syndication services to their small business end users. Smart Online began targeting small business media companies in Q1 of 2004, such as Inc. Magazine, BusinessWeek Magazine, NY Report Magazine and FastCompany Magazine, who have small business customer bases. The strategy has been to implement Private Label Syndication platforms in exchange for advertising and joint marketing programs with these companies. Smart Online estimates the revenue capabilities from its back-end revenue share arrangements with these contracts will enable it to increase web services revenue for both Smart Online and its partners. Smart Online expects to create certain types of these arrangements in the future with media companies who offer the ability to reach small business customers and will assist in off-setting Smart Online’s outlay of cash for print and online Advertising and Marketing while providing reduced Advertising prices. Media companies are requesting such services to assist in driving additional revenue.
As our revenues increase, we plan to continue to invest heavily in marketing and sales by increasing the number of direct sales personnel and increase penetration within our existing customer base, expanding our domestic and international selling and marketing activities, building brand awareness and participating in additional marketing programs. We expect that in the future, marketing and sales expenses will increase in absolute dollars and will be a significant cost. During late 2003 and early 2004, we added a Vice President of Marketing and a Vice President of Global Accounts as initial steps to broadening the marketing and sales infrastructure.
General and Administrative . General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resources, and management information systems personnel, professional fees, and other corporate expenses, including facilities costs. We expect that in the future, general and administrative expenses will increase as we add personnel and incur additional professional fees and insurance costs related to the growth of our business and to our operations as a public company.
Stock-Based Expenses . Our operating expenses include stock-based expenses related to options and warrants issued to employees and non-employees. These charges have been significant and are reflected in our historical financial results.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. “Critical accounting policies and estimates” are defined as those most important to the financial statement presentation and that require the most difficult, subjective, or complex judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions and/or conditions, actual results of operations may materially differ. We periodically re-evaluate our critical accounting policies and estimates, including those related to revenue recognition, provision for doubtful accounts and sales returns, expected lives of customer relationships, useful lives of intangible assets and property and equipment, provision for income taxes, valuation of deferred tax assets and liabilities, and contingencies and litigation reserves. We presently believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
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Revenue Recognition – We recognize revenue in accordance with accounting standards for software and service companies including the United States Securities Exchange Commission (“SEC”) Staff Accounting Bulletin 104 “Revenue Recognition” (“SAB 104”), Emerging Issues Task Force Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) , and related interpretations including American Institute of Certified Public Accountants (“AICPA”) Technical Practice Aids. We also utilize interpretative guidance from regulatory and accounting bodies, which include, but are not limited to, the SEC, the AICPA, the Financial Accounting Standards Board (“FASB”), and various professional organizations. We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
We recognize revenues from syndication, integration and web business services each month over the estimated lives of the contracts, typically the contract term. Should the contract terminate earlier than its term then we recognize the remaining deferred revenue upon termination. Subscription revenue is recognized ratably over the subscription period. Third-party premium products are shared with integration partners. Other revenue, consisting primarily of consulting services from related parties are recognized when the services are rendered.
Barter Transactions – Barter revenue relates to syndication and integration services provided by Smart Online to business customers in exchange for advertising in the customers’ trade magazines and on their Web sites. Barter expenses reflect the expense offset to barter revenue. The amount of barter revenue and expense is recorded at the estimated fair value of the services received or the services provided, whichever is more objectively determinable, in the month the services and advertising are exchanged. Smart Online applies the provisions of EITF 99-11, “Accounting for Advertising Barter Transactions Involving Barter Credits” and, accordingly, recognizes barter revenues only to the extent that Smart Online has similar cash transactions within a period not to exceed six months prior to the date of the barter transaction. Barter revenues totaled $63,333 for the six-months ended June 30, 2004. Smart Online did not have any barter transactions for the years ended December 31, 2003 and 2002.
Impairment of Long Lived Assets – Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Income Taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating our current tax liabilities in each jurisdiction, including the impact, if any, of additional taxes resulting from tax examinations as well as making judgments regarding our ability to realize our deferred tax assets. Such judgments can involve complex issues and may require an extended period to resolve. In the event we determine that we will not be able to realize all or part of our net deferred tax assets, an adjustment would be made in the period such determination is made. We recorded no income tax expense in any of the periods presented, as we have experienced significant operating losses to date. If utilized, the benefit of our total net operating loss carryforwards may be applied to reduce future tax expense. Since our utilization of these deferred tax assets is dependent on future profits, which are not assured, we have recorded a valuation allowance equal to the net deferred tax assets. These carryforwards would also be subject to limitations, as prescribed by applicable tax laws. As a result of prior equity financings and the equity issued in conjunction with certain acquisitions, we have incurred ownership changes, as defined by applicable tax laws. Accordingly, our use of the acquired net operating loss carryforwards may be limited. Further, to the extent that any single year loss is not utilized to the full amount of the limitation, such unused loss is carried over to subsequent years until the earlier of its utilization or the expiration of the relevant carryforward period.
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Overview of Results of Operations for the Fiscal Year Ended December 31, 2003
Revenues during fiscal 2003 were $1,261,223, a decrease of 9.4 percent compared to fiscal 2002. The net loss during fiscal 2003 was $1,558,773 compared to a net loss of $805,406 for fiscal 2002. The decrease in revenues was primarily due to the management and officers of Smart Online focusing their efforts during the last half of 2003 on strategic planning, negotiating and evaluating a potential sale of the company, and structuring and negotiating a corporate reorganization in which preferred stock owners converted to common stock. These major efforts took time and focus away from all employees of the company and resulted in a significant reduction in the sales effort.
Fiscal Years Ended December 31, 2003 and 2002
Results of Operations
The following tables set forth selected statements of operations data for each of the periods indicated.
For the years ended
December 31:2002
2003
Revenues
Integration fees $ 869,132 $ 710,474 Syndication fees 202,368 115,544 OEM revenue 43,608 48,620 Web services 241,420 207,570 Other revenues
35,117
179,015 Total Revenues
$
1,391,645
$
1,261,223
Revenues. Total revenues were $1,261,223 in fiscal 2003 compared to $1,391,645 in fiscal 2002, a decrease of $130,422, or 9.4 percent. The decrease in revenues was primarily due to the management and officers of Smart Online focusing their efforts during the last half of 2003 on strategic planning, negotiating and evaluating a potential sale of the company, and structuring and negotiating a corporate reorganization in which preferred stock owners converted to common stock. These major efforts took time and focus away from all employees of Smart Online and resulted in a significant reduction in the sales effort. This reduction in sales effort was off-set in part by revenue from performing services for a related party in 2003. Revenue from related parties accounted for $11,578 or approximately 0.8%, of the 2002 revenues and $492,857 or approximately 39.1%, of the 2003 revenues. See "Revenue from Related Parties" and Note 12 of Notes to Financial Statements for a description of related party transactions. Additionally, the 2002 period included $133,979 of non-recurring revenue recognized upon the early termination of certain integration agreements. During the 2003 period only $76,389 of revenue was recognized from early contract terminations.
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Integration fees decreased from $869,132 in fiscal 2002 to $710,474 in fiscal 2003, a decrease of $158,658, or 18.3%. As noted above, Smart Online's 2003 sales and marketing efforts were significantly reduced resulting in a significant reduction in the signing of new integration customers with the number of new integration customers decreasing from 7 in 2002 to 3 in 2002.
Syndication fees decreased from $202,368 in fiscal 2002 to $115,544 in fiscal 2003, a decrease of $86,824, or 42.9%. This decrease in syndication fees is primarily attributable to the expiration of a large syndication contract that accounted for approximately $108,000 of syndication revenue in 2002 and $0 in 2003. The impact of the contract termination was offset in part by the signing of a new syndication partner in April 2002. 2003 syndication fees from this new partner were approximately $21,000 higher than in 2002 as the 2003 period covered a full year whereas the 2002 revenues related to only the last nine months of 2002.
Other revenues increased from $35,117 in fiscal 2002 to $179,015 in fiscal 2003, an increase of $143,898, or 409.8%. As discussed in Note 11 of Notes to Financial Statements, other revenues for the 2003 period included $150,000 of consulting services rendered to an entity owned by an officer of Smart Online and by the officer's brother, who is also an employee of Smart Online.
Operating Expenses
Salaries and Wages. Salaries and wages, including commissions, deferred compensation, and expense associated with stock based compensation increased from $1,238,740 in 2002 to $1,612,268 in 2003. This increase is primarily attributable to the inclusion of $535,000 of stock based compensation expense in 2003 as compared to approximately $50,000 in 2002. This increase was offset partially by a reduction in headcount from approximately 15 full-time employees during 2002 to 13 full-time employees during 2003. Additionally, commission expense decreased by approximately $7,000, because of lower sales in 2003 as compared to 2002. Deferred compensation decreased from $369,000 in 2002 to $354,000 in 2003 as a result of salary reductions agreed upon by members of the management team.
Employee Benefits. Employee benefits decreased from 10.7% of salaries and wages in 2002 to 8.8% of salaries and wages in 2003. This decrease was primarily the result of the 2003 period including $535,000 of the stock based compensation expense that had no associated benefit cost. This decrease was offset in part by increased health insurance cost. Smart Online expects that such increase will continue in the future as result of increases in health insurance cost.
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Other Employee Costs. Other employee costs are primarily related to employee travel expense. Travel related expenses increased slightly from $39,000 in 2002 to $41,000 in 2003. Smart Online expects that such cost would continue to increase in the future as new employees are added to our existing workforce.
Advertising and Marketing. Advertising and marketing expenses were approximately $22,000 lower in 2003 as compared to 2002 primarily as a result of Smart Online significantly reducing expenditures in an effort to conserve cash. The 2002 period included approximately $9,500 of direct mail, $2,400 of public relations, and approximately $10,000 of other advertising and marketing not included in the 2003 period. Smart Online expects the Advertising and Marketing budgets to continue to increase as the company builds its sales and marketing infrastructure. Smart Online is executing a number of marketing initiatives such as the barter arrangements with media companies to assist in growing Web Services revenue while reducing the cost of customer acquisition and penetration. Smart Online is also increasing spending to build a telesales department to up sell current Smart Online users with other Smart Online services and to approach former installed base customers regarding new Smart Online’s product and service offerings.
Consulting Expense. Consulting expense increased from $2,000 in 2002 to approximately $587,000 in 2003. During 2003 Smart Online engaged the services of consultants, including an entity owned by one of our officers, to assist in the co-development of the Smart Online’s instant messenger product resulting in approximately $38,000 of additional expense in 2003. Additionally, during 2003 Smart Online engaged a financial consulting firm to assist with restructuring our capitalization, evaluating financing alternatives and assisting it to raise additional capital.
Depreciation Expense . Depreciation expense decreased from $242,877 in 2002 to $59,852 in 2003, a reduction of $183,025. Approximately $143,000 of this decrease is attributable to computer hardware and software that was fully depreciated by December 31, 2002. Additionally, during 2002 Smart Online disposed of approximately $164,000 of equipment and furniture on which approximately $11,000 of depreciation was recorded in 2002 and $0 in 2003.
Rent and Facilities Costs. Rent and facilities costs decreased by approximately $9,000 from 2002 to 2003 primarily as a result of Smart Online terminating our existing lease agreement in mid-2002 and relocating to a smaller office space.
Legal and Professional Fees. Legal and professional fees increased from $319,000 to $355,000 in 2003. Approximately $24,000 of this increase was attributable to the engagement of a contract-CFO with the remainder of the increase being attributable to legal fees primarily related to litigation.
Penalties. Penalties relate to payroll taxes for the period of fourth quarter 2000 through the fourth quarter of 2003. In March 2004, Smart Online paid the outstanding balance if its payroll taxes in the amount of $1,003,830 plus accrued interest of $122,655 to the Internal Revenue Service. The Internal Revenue Service has notified Smart Online that it owes an additional $512,555 of penalties plus accrued interest related to the above matter and that additional penalties and interest will continue to accrue until the obligation is fully paid or a settlement is reached. Smart Online has retained counsel to vigorously contest the imposition of penalties through the appeals process and, if such appeals are denied, to pursue a settlement with the Internal Revenue Service. As of December 31, 2003, Smart Online has accrued the full amount of this proposed assessment in the periods to which the penalties relate .
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Other Operating Expenses.
Other operating expenses decreased from $111,683 in 2002 to $56,087 in 2003. During the 2002 period Smart Online incurred approximately $53,000 of non-recurring third party development costs and website hosting fees that were not included in 2003.
| For the years ended December 31: | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | |||||||
| Other Income & Expenses | ||||||||
| Interest expense | $ | (89,912 | ) | $ | (186,248 | ) | ||
| Gain from debt forgiveness | 338,866 | 492,757 | ||||||
| Loss on disposal of asset | (54,595 | ) | – | |||||
| TOTAL Other Income & Expenses |
$ |
194,359 |
$ |
306,509 | ||||
Other Income (Expense).
During 2002 and 2003 Smart Online realized gains totaling $338,866 and $492,757 resulting from negotiated and contractual releases of outstanding liabilities. Additionally, during 2002 Smart Online realized a loss of $54,595 in connection with disposing of assets principally related to Smart Online moving to new office space.
Results of Operations for the Six Months Ended June 30, 2004 and 2003Revenues during the six months ended June 30, 2004 totaled $551,369, a decrease of 27.9 percent compared to the six months ended June 30, 2003. The decrease in revenues was primarily due to an approximately $81,000 reduction in web services revenue and a decrease of approximately $154,000 in other revenues. For the 2003 period, web services revenue included non-recurring revenues of $47,000 primarily related to advertising and marketing programs and back-end fees earned from partners . Other revenues for the 2003 period included $150,000 of consulting services rendered to an entity owned by an officer of Smart Online and by the officer’s brother, who is also an employee of Smart Online. Operating expenses increased from approximately $1.0 million during the first six months of 2003 to $1.7 million during the first six months of 2004. During this same period, our net loss increased from $109,538 to $1,226,275 for the six months of ended June 30, 2003 and 2004, respectively.
During the six months ended June 30, 2004, we continued to incur substantial costs and operating expenses related to growing our business and preparing to become a public company. We are adding sales personnel to focus on adding new customers and increasing penetration within our existing customer base, and developers to broaden and enhance our on-demand service.
During fiscal 2004, we added sales personnel and a marketing person to focus on increasing penetration within our existing customer base. In addition, we incurred costs associated with corporate governance and regulatory compliance. We intend to continue to invest heavily in marketing and sales in order to pursue new customers and expand relationships with existing customers. We also plan to expand our infrastructure, including additional geographically remote disaster recovery services provided by a third-party Web hosting service provider in the third quarter of 2004, and to continue to invest in research and development activities to upgrade and extend our service offerings.
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Six Months Ended June 30, 2004 and 2003
Results of Operations
The following tables set forth selected statements of operations for the period indicated:
|
For the six months
ended June 30, 2004 |
For the six months
ended June 30, 2003 |
|||||||
| Revenues | ||||||||
| Integration fees |
$ |
420,178 | $ | 411,622 | ||||
| Syndication fees | 65,780 | 57,772 | ||||||
| OEM revenue | 28,435 | 24,310 | ||||||
| Web services | 34,990 | 115,943 | ||||||
| Other revenues | 1,986 | 155,586 | ||||||
|
Total Revenues |
|
|
$ |
551,369 |
|
$ |
765,233 |
|
Revenues. Integration and syndication revenues totaled approximately $486,000 during the first half of 2004 as compared to approximately $469,000 during the first half of 2003. Revenue from related parties constituted 31.3 % and 63.6% of revenue during the first six months of 2004 and 2003, respectively. See “Revenue from Related Parties” and Note 11 of Notes to Financial Statements for a description of related party transactions.
In June 2004, Smart Online added three new syndication partners, including one of the 35 largest banks in the United States and two major business publications that have print and on-line exposure to over four million customers. Only $4,537 of revenue was recognized from these new syndication partners during June 2004. The syndication agreements with the business publications were structured partially as barter transactions where we will receive strategic on-line and print advertising in exchange for creating a private-label syndication site. Additionally, Smart Online will receive a share of revenues generated from these sites. We recognized an immaterial portion of expected revenues from these agreements during June 2004 and will begin recognizing revenue on all three agreements starting in July 2004.
Smart Online also added two new integration partners during the first half of 2004. Both of these agreements were structured partially as barter transactions where we will receive online and print advertising to drive customers to www.smartonline.com and additional on-line content to further enhance our syndication platform offerings in exchange for integrating the partners content and offerings into the Smart Online’s syndication platform. During the first half of 2004, Smart Online recognized $63,333 of barter revenue, or 11.5% of total first half 2004 revenues. No barter revenue was recognized during the 2003 period.
As noted above, web services revenues decreased by approximately $81,000 and other revenues decreased by approximately $154,000. For the 2003 period, web services revenue included non-recurring revenues of $47,000 primarily related to advertising and marketing programs and back-end fees earned from partners. Other revenues for the 2003 period included $150,000 of consulting services rendered to an entity owned by an officer of Smart Online and by the officer’s brother, who is also an employee of Smart Online
As of June 30, 2004, Smart Online had deferred revenue of $580,719.
63
|
For the six months
|
For the six months
ended June 30, 2003 |
|||||||
| Operating Expenses | ||||||||
| Salary and deferred compensation |
$ |
790,584 | $ | 543,355 | ||||
| Employee benefits | 78,596 | 69,896 | ||||||
| Other employee costs | 47,762 | 20,994 | ||||||
| Advertising and marketing | 77,992 | 8,550 | ||||||
| Consulting expense | 203,866 | 51,500 | ||||||
| Depreciation | 20,015 | 29,927 | ||||||
| Rent & facilities costs | 85,998 | 68,738 | ||||||
| Legal & professional fees | 330,300 | 149,382 | ||||||
| Penalties | 38,369 | 53,182 | ||||||
| Other operating expenses | 38,960 | 25,090 | ||||||
|
Total Operating Expenses |
|
|
$ |
1,712,442 |
|
$ |
1,020,614 |
|
Operating Expenses
Salaries and Wages. Salaries and wages, including commissions, deferred compensation, and expense associated with stock based compensation was $790,584 during the first six months of 2004 as compared to $543,355 for the first six months of 2003 primarily due to an increase in the number of employees and the inclusion of $161,000 of stock based compensation expense . The total number of employees ranged from 13 during the 2003 period to 16 during the 2004 period. As a result of improved financial resources resulting from equity financing obtained during 2004, the officers of Smart Online stopped deferring compensation in 2004 resulting in a decrease in deferred compensation expense of approximately $55,000 and increase in cash based compensation.
Employee Benefits. Employee benefits were 9.9% of salaries and wages during the first six months of 2004 and 12.9% of salaries and wages during the first six months of 2003. This decrease was primarily the result of the 2004 period including approximately $161,000 of stock based compensation expense that had no associated benefit cost.
Other Employee Costs . Other employee costs are primarily related to employee travel expense.Advertising and Marketing. Advertising and marketing expenses during the first six months of 2004 were $77,992, primarily as a result of barter advertising expense as more fully discussed under “revenues” above. Smart Online expects advertising and marketing to continue at or above the first six months of 2004 level for the foreseeable future as we expand our sales and marketing function. One of the areas of focus the Company intends to accomplish in this expansion has been to embark on an effort to develop programs similar to customer acquisition efforts by Google, Overture, and Career Builder. The strategy will work to secure media companies that desire to provide Smart Online’s Private Label Syndication services to partner’s small business end users. We began targeting small business media companies in Q1 of 2004, such as Inc. Magazine, BusinessWeek Magazine, NY Report Magazine and FastCompany Magazine, who have small business customer bases. The strategy was to implement Private Label Syndication platforms in exchange for advertising and joint marketing programs with these companies. We estimate the revenue capabilities from our back-end revenue share arrangements with these contracts will enable us to increase web services revenue for both Smart Online and our partners. We believe these arrangements will both grow Web Services revenue and reduce the cost of customer acquisition and penetration. Advertising and marketing activities were significantly lower during 2003 with only $8,550 expensed during the first six months of 2003 due to severe limitations on financial resources.
64
Consulting Expense. Consulting expense was $203,866 for the first six months of 2004 as compared to $51,500 for the comparable 2003 period. The 2004 period includes fees paid to consultants to assist with evaluating financing alternatives and assisting us to raise additional capital.
Rent and Facilities Costs. Rent and facilities costs were $85,998 during the first six months of 2004 as compared to $68,738 during the first six months of 2003. During the summer of 2003, the Company terminated its previous lease and relocated its offices. In addition to costs associated with relocating offices, Smart Online incurred approximately $15,000 of expense related to property and corporate insurance .
Legal and Professional Fees. Legal and professional fees were $330,300 for the first six months of 2004 as compared to $149,382 for the first six months of 2003. These 2004 fees included approximately $95,000 of accounting fees related to reviewing Smart Online’s unaudited historical financial statements, the audit of Smart Online’s books for 2002 and 2003, and preliminary work related to registering our common stock with the Securities and Exchange Commission. Additionally, legal fees increased from $59,000 for the first half of 2003 to $236,000 for the first half of 2004 as Smart Online incurred additional costs related to the conversion of the preferred stock to common stock, raising additional capital and preparing this registration statement.
Penalties. In March 2004, Smart Online paid the outstanding balance if its payroll taxes in the amount of $1,003,830 plus accrued interest of $122,655, for the period of fourth quarter 2000 through the fourth quarter of 2003, to the Internal Revenue Service. The Internal Revenue Service has notified Smart Online that it owes an additional $512,555 of penalties plus accrued interest related to the above matter and that additional penalties and interest will continue to accrue until the obligation is fully paid or a settlement is reached. Smart Online has retained counsel to vigorously contest the imposition of penalties through the appeals process and, if such appeals are denied, to pursue a settlement with the Internal Revenue Service. As of June 30, 2004, Smart Online has accrued the full amount of this proposed assessment in the periods to which the penalties relate.
Interest Expense. Interest expense was $114,597 in the first six month of 2004 as compared to $48,928 in the first half of 2003. This amount included approximately $75,000 of stock issued to holders of promissory notes in exchange for their extending the terms of outstanding loans and to lend additional funds to Smart Online during late 2003 and interest accrued on unpaid deferred compensation balances that were converted to interest-bearing promissory notes in October 2003. Interest expense for the remainder of 2004 is expected to be lower than the first half as the stock-based interest expense is not anticipated to be recurring in nature.
Gain From Debt Forgiveness . During the first six months of 2004 and 2003, Smart Online realized gains totaling $49,395 and $194,771, respectively, resulting from negotiated and contractual releases of outstanding liabilities. By June 30, 2004 Smart Online had negotiated or paid substantially all of its trade liabilities and expects future gains from debt forgiveness to be immaterial.
65
Provision for Income Taxes:
We have not recorded a provision for income tax expense because we have been generating net losses. Furthermore, we have not recorded an income tax benefit for fiscal 2002 and 2003 primarily due to continued substantial uncertainty regarding our ability to realize our deferred tax assets. Based upon available objective evidence, there has been sufficient uncertainty regarding the ability to realize our deferred tax assets, which warrants a full valuation allowance in our financial statements. Smart Online has approximately $26 million in net operating loss carryforwards, which may utilized to offset future taxable income.
Liquidity and Capital Resources
Our auditors have issued an explanatory paragraph in its report in which they express substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should Smart Online be unable to continue as a going concern. Smart Online’s continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meets its obligations on a timely basis, to obtain additional financing as may be required and ultimately to attain profitable operations and positive cash flows. Smart Online’s future plans include the development introduction and maintenance of Smart Online’s next generation product, OneBiz Conductor, and the introduction of additional new products and enhancing its webnative business applications. As more fully described in Note 13, during August through September 27, 2004, Smart Online raised an additional $1,450,000 through the sale of additional shares of Common Stock during the second half of 2004. Additionally, Smart Online is in discussions with several potential integration, syndications, and technology platform licensing partners that, if successful, could result in positive cash flow from operations.
At December 31, 2003, our principal sources of liquidity were cash and cash equivalents totaling $101,486 and accounts receivable of $82,576. Additionally, we had $947,640 in deferred revenue. During the year ended December 31, 2003, Smart Online generated net cash from financing activities totaling $773,690, including $554,004 from sales of preferred stock and $190,000 of borrowings under notes payable. During this same period , Smart Online consumed $688,447 of cash in operations.
At June 30, 2004, our principal sources of liquidity were cash and cash equivalents totaling $322,065 and accounts receivable of $52,856. Smart Online’s receivables are primarily from major companies or banking institutes, and not end users. Considering our business model, we anticipate our receivables likely to increase as a percentage of total revenue. Management has evaluated the need for an allowance for doubtful accounts and determined that no provision for uncollectible accounts is required as of June 30, 2004 and December 31, 2003 and 2002. During the six months ended June 30, 2004, Smart Online generated net cash from financing activities, including the sales of common stock, of $2,897,163. During the same period Smart Online consumed $2,651,676 of cash in operations, including payment of $1,126,485 paid related outstanding payroll liabilities
Additionally, we currently do not have a bank line of credit.
66
During the first quarter of 2004, Smart Online completed a corporate reorganization of its capital stock, which eliminated the Series A Preferred Stock of Smart Online. All holders of Series A Preferred Stock who participated in the reorganization by signing Reorganization, Lock-up Proxy and Release agreements dated January 1, 2004 (the “Reorganization Agreements”) received two shares of common stock of Smart Online for each share of Series A Preferred Stock they held prior to the reorganization and also received the right to receive cash payments from Smart Online equal to a percentage of the net proceeds Smart Online raises during calendar year 2004 from sales of equity securities and convertible debt securities in excess of $5 million of net proceeds. The percentage payable to participating holders of Series A Preferred Stock is as follows: (i) 20% of net proceeds between $5 million and $10 million of net proceeds, (ii) 30% of net proceeds between $10 million and $15 million of net proceeds, and (iii) 40% of net proceeds between $15 million and $20 million of net proceeds. As of June 30, 2004, Smart Online raised a total of $3,496,993 of net proceeds during 2004. Smart Online made no payments to participating holders of Series A Preferred Stock and no payments are due. This agreement to share a percentage of capital raised will make it more difficult for Smart Online to raise additional capital and will have an adverse effect on the terms of any financing Smart Online obtains.
We believe our existing cash and cash equivalents and cash provided by operating activities will not be sufficient to meet our working capital and capital expenditure needs over the next 12 months. Smart Online’s future plans include the development introduction and maintenance of Smart Online’s next generation product, OneBiz Conductor, and the introduction of additional new products and enhancing its webnative business applications. Also, during August and September 2004, Smart Online raised an additional $1,450,000 through the sale of additional shares of Common Stock. Additionally, Smart Online is in discussions with several potential integration, syndications, and technology platform licensing partners that, if successful, could result in positive cash flow from operations. However, there can be no assurance that these efforts will be successful.
Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, and the market acceptance of our services. To the extent that existing cash and securities and cash from operations, are insufficient to fund our future activities, we will need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Smart Online is subject to other claims and suits that arise from time to time in the ordinary course of business. While management currently believes that resolving these matters, individually or in aggregate, will not have a material adverse impact on Smart Online’s financial position or results of operations, the litigation and other claims noted above are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on Smart Online’s financial position and the results of operations for the period in which the effect becomes reasonably estimable. See “Legal Proceedings” for a description of current litigation.
67
Quantitative and Qualitative Disclosures about Market Risk
Foreign currency exchange risk
During 2002, 2003, and the first six months of 2004, all of our contracts and transactions were U.S. dollar denominated. As a result our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates.
Interest rate sensitivity
We had unrestricted cash and cash equivalents totaling $322,065 at June 30, 2004, $101,486 at December 31, 2003 and $26,940 at December 31, 2002. These amounts were invested primarily in demand deposit accounts and money market funds. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
OFFICERS, DIRECTORS, PROMOTERS AND CONTROL PERSONS
Executive Officers and Directors
The names of our directors and executive officers are listed below. None of the officers and directors of Smart Online named below serve on the Board of Directors of any other public reporting company. Our executive officers are appointed by our board of directors to hold office until their successors are appointed the terms of all directors expire at the next annual meeting of stockholders and upon election of their successors. The terms of all officers expire upon the next annual meeting of the Board of Directors and upon the election of the successors to such officers.
Michael Nouri, President and Chief Executive Officer, Chairman of the Board and Director. Mr. Nouri co-founded Smart Online in 1993 to develop and market business productivity software to provide small businesses with cost-effective tools that address critical business issues and enhance their competitive positioning. He has been President, Chief Executive Officer, Chairman of the Board and a Director of Smart Online since it was started. Prior to founding Smart Online, Mr. Nouri was founder and CEO of the Nouri Group of Companies from 1980 to 1991. The Nouri Group of Companies acquired a number of government-owned manufacturers in Europe and privatized them. The Nouri Group was a multi-national conglomerate with diversified activities in real estate development, investment, construction, motoryacht manufacturing, high-end home design and architecture, marketing and publishing and stock trading. More than half of the company’s business was derived from real estate development and investment and joint ventures. Another third of the company’s business was derived from construction and motoryacht manufacturing.
68
Henry Nouri, Executive Vice President, Research and Development, and Director. Mr. Nouri co-founded Smart Online in 1993 and has been its Vice President, Research and Development and a Director since that time. Currently, he manages Smart Online’s research and development teams. He is responsible for development of the company’s CD-ROM and Internet-hosted applications, for creating the extensive research and information management systems required to control the flow of vital validated business data and the effective delivery of that information to the business user.
Ronna Loprete, Vice President, Administration and Director. Ms. Loprete is responsible for all administrative and office operations activities. In addition, she manages Smart Online’s relationships with legal advisors and develops and defines all corporate and organizational policies. She joined Smart Online in 1995. In 1998 she became Vice President, Administration. In 1996 she became a Director of Smart Online. Prior to joining Smart Online in 1995, she was a territory supervisor/administrator for Markel Corporation, a high-risk insurance company.
Thomas Furr, Vice President, Sales and Director. Mr. Furr is responsible for developing and implementing strategies to leverage existing direct and indirect distribution channels. He has been Vice President, Sales of Smart Online since 2001. In 2002 he also became a Director. He was a co-founder and president of Kinetics, Inc., one of the first online commerce providers for the small business industry, from 1994 until 1995. Smart Online purchased Kinetics in 1995. After founding Kinetics, Mr. Furr was with the Plurimus Corporation from 1999 until 2001, where he managed Plurimus’ southeast direct sales efforts. Previously, from 1996 until 1999 he managed East Coast direct sales and channel efforts in Canada and South Africa for Information Retrieval Corporation (IRC), a leading multi-national back-end CRM/help desk company. Mr. Furr holds a bachelor’s degree in finance from East Carolina University.
Anil Kamath, Vice President, Technology. Mr. Kamath joined Smart Online as Director of Database Implementation in July 1999 and became Vice President, Technology in 2000. Mr. Kamath is responsible for the architecture of the web-native (SaS) platform at SmartOnline; supervises the development team, and provides architectural design direction for new software and hardware implementations. Before joining Smart Online he was the senior database architect for A-4 Health Systems from 1998 to 1999 and senior software architect and technical manager of BSG Imonics) from 1991 until 1997. He holds a master’s degree in computer and information sciences from the University of Florida.
Deborah Lovig, Vice President, Marketing. Ms. Lovig is responsible for developing and implementing marketing strategies and programs to generate awareness of Smart Online’s ideal business models and product offerings among prospective syndication partners and small business owners. She has been Vice President-Marketing of Smart Online since March 2004. Prior to joining Smart Online she was Vice President of Marketing from 1993 until 1996 for CI Technologies, a software company which was acquired by Seagate Technology. From 1996 until 2004 she was a principal consultant with Accelerant Ventures, which provided marketing and investor relations consulting to early-stage companies. From 1990 until 1992 she was vice president at Ruder Finn Public Relations. Ms Lovig holds a bachelor’s degree in journalism and mass communication from Iowa State University.
Tamir Sagie, General Manager, International Business. Mr. Sagie is responsible for developing the strategic direction and implementing the sales and marketing strategies for Smart Online's European business unit. He joined Smart Online and became General Manager, International Business in 2003. He is the founder and was the CEO of Smart I.L. Ltd., which provided customized enterprise IM focused on the call center and help desk support market from 2001 until 2003. Prior to Smart I.L. Ltd., from 2000 until 2001Mr. Sagie was vice president of business development for DataCo solutions, a direct marketing corporation specializing in data modeling. Prior to his role with DataCo solutions, Mr. Sagie was the director of research and development for McLeodUSA. He began his career as a project manager in the IT department at Nextel. Mr. Sagie has a bachelor's degree from Hadassah College in Israel.
69
Jose Collazo,
Vice President, Internet Development.
Mr. Collazo is responsible for overseeing all
aspects of software development. Joining Smart Online in 1995, he has been a major
contributor to Smart Online's extensive suite of offline and online applications. Mr. Collazo is an expert is using core web technologies, such as Java, HTML, XML / XSL, and
was instrumental in the development of the syndication platform used by Smart Online for
its syndication partners. Mr. Collazo holds a bachelor's degree in computer science from
the University of Georgia.
Except as disclosed below, none of the directors or executive officers has, during the past five years:
(a) Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(b) Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
(c) Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and
(d) Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Michael Nouri and Henry Nouri were officers and directors of two companies in Italy, which were ordered into bankruptcy by Italian courts in 1993. Under Italian laws, Michael Nouri and Henry Nouri cannot serve as an officer or director of any Italian company, because of these bankruptcies.
Board of Directors.
The current composition of our board of directors makes it difficult to comply with Securities and Exchange Commission, stock exchange and NASDAQ rules regarding board members, committees and other corporate governance standards. We will seek to change our board of directors to meet these standards when we identify qualified people who are willing to serve on our board of directors.
Number of Directors. Our board of directors currently consists of four persons. Our bylaws provide that the whole board of directors may consist of that number of directors as determined by the Board of Directors from time to time.
Term of Office. Our directors are currently elected to hold office until the next annual meeting of our stockholders and until their respective successors have been elected and qualified, but our Bylaws provide that when the number of directors increases to six or more members our directors will have staggered terms of three years so that each year the terms of approximately one third of the entire Board of Directors will expire. The last annual meeting or written consent in lieu of annual meeting of our stockholders was held on June 1, 2004.
70
Independent Directors. None of our Directors are “independent,” as defined in Securities and Exchange Commission or stock exchange or NASDAQ rules. We intend to search for independent Directors and add them to our Board when we identify suitable candidates who are willing to serve as directors.
Committees. Our board of directors currently does not have any audit committee or any other committee. None of our current directors have the experience and qualification to meet the definition of a “financial expert” under Securities and Exchange Commission rules governing audit committees and we have no independent directors. We are looking for a suitable candidate, who would meet the definition of “financial expert” and be independent, to join our board of directors and audit committee. We intend to form an audit committee and other committees of our Board when we recruit independent directors, including a financial expert and other directors with the experience necessary for audit committee membership.
Code of Ethics. We have not adopted a code of ethics applicable to our executives, as defined by applicable rules of the SEC. We intend to adopt a code of ethics after we recruit independent directors and when we do, it will be publicly available on our web site at www.smartonline.com . If we make any amendments to our code of ethics other than technical, administrative, or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of our code of ethics to our chief executive officer, chief financial officer, or certain other finance executives, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our web site at www.smartonline.com or in a report on Form 8-K filed with the SEC.
Advisory Board
We have organized an Advisory Board, consisting of up to 10 professionals representing expertise in a broad range of business areas to assist Smart Online marketing and sales executives with ongoing product development planning, pricing, partnerships, new product development and other issues, including customer acquisition and retention. Advisory Board members provide advice to Smart Online’s management, but do not have any power to make decisions. Advisory Board members also do not have the same duties and liabilities as members of Board of Directors have. Each of our Advisory Board members has been granted nonqualified options to purchase 10,000 shares of common stock at an exercise price of $3.50 per share, which options vest in equal increments of 1,250 per meeting attended, provided the member remains on the Advisory Board for at least one year. To date, members of the Advisory Board include Teresa Spangler, Mark Easley, Thomas Mar Easley, Mark Self, Rick Bernhardt and Brian Kinahan.
SECURITY
OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of our common stock as of September 29, 2004: (i) by each person who is known by us to beneficially own more than 5% of our common stock and after completion of this offering; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.
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|
Beneficial Owner
Name and Address |
No. of Shares (1)(2) |
Percentage
(2)
At September 15, 2004 |
Percentage After Offering
Completed (2)(3) |
|||
|
Michael Nouri
(4)(5)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
3,302,027 |
28 % |
28 % |
|||
|
Henry Nouri
(4)(6)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
3,091,984 |
26 % |
26 % |
|||
|
Ronna Loprete
(7)
C/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
340,631 |
3 % |
3 % |
|||
|
Thomas Furr
(8)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
410,637 |
3 % |
3 % |
|||
|
Amil Kamath
(9)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
200,000 |
2 % |
2 % |
|||
|
Deborah Lovig
(10)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
0 |
0 % |
0 % |
|||
|
Tamir Sagie
(11)(12)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
275,000 |
2 % |
2 % |
|||
|
Atlas Capital SA
(13) (14)
116 Rue du Rhone CH-1204 Geneva, Switzerland |
1,176,341 |
10 % |
0 % |
|||
|
Greenleaf Ventures Ltd.
c/o Granot, Strauss, Adar & Co. 28 Bezalel Street Ramat Gan 52521, Israel |
1,448,619 |
13 % |
13 % |
|||
|
Jose Collazo
(15)
c/o Smart Online, Inc. 2530 Meridian Parkway Durham, North Carolina 27713 |
200,700 |
2 % |
2 % |
|||
|
All officers and directors
as a group (8 persons) (16) |
4,978,995 |
40 % |
40 % |
| (1) |
All shares are common stock. |
| (2) |
The preceding table was prepared based solely upon the information furnished to us by officers, directors and stockholders as of September 29, 2004 and from corporate stock transfer ledgers. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option or a warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the number of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on September 29, 2004. As of September 29, 2004, there were 11,629,372 shares issued and outstanding. |
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| (3) |
Assumes that all securities offered hereby will be sold. |
| (4) |
Includes 2,841,984 shares owned by American Investment Holding Group, owned by Michael and Henry Nouri, and as to which they share the power to vote and the power to dispose of such shares, and solely with respect to Michael Nouri also includes 87,043 shares owned by Charter Holding LLC, owned by Michael Nouri, which includes 23,000 shares of common stock owned by a trust for which Michael Nouri is the trustee and is not a beneficiary. Does not include shares owned by Ronna Loprete, wife of Michael Nouri. |
| (5) |
Includes 250,000 shares which can be acquired upon the exercise of options which can be exercised at any time within the sixty (60) days after September 29, 2004. |
| (6) |
Includes 250,000 shares which can be acquired upon the exercise of options which can be exercised at any time within the sixty (60) days after September 29, 2004. |
| (7) |
Includes 75,000 shares which can be acquired upon the exercise of options which can be exercised at any time within the sixty (60) days after September 29, 2004. Does not include shares beneficially owned by Michael Nouri, husband of Ronna Loprete. |
| (8) |
Includes 75,000 shares which can be acquired upon the exercise of options which can be exercised at any time within the sixty (60) days after September 29, 2004. |
| (9) |
Does not include 75,000 shares subject to options which cannot be exercised within sixty (60) days after September 29, 2004. |
| (10) |
Does not include 75,000 shares subject to options which cannot be exercised within sixty (60) days after September 29, 2004. |
| (11) |
Includes 200,000 shares which can be acquired upon the exercise of options which can be exercised at any time within the sixty (60) days after September 29, 2004. |
| (12) |
Includes 60,000 shares owned by Nen, Inc. as to which Mr. Sagie is sole owner. Does not include 1,448,619 shares owned by Greenleaf Ventures Ltd., of which 29.5% is owned by Mr. Sagie, who is not an officer or director of Greenleaf and who does not have the power to vote or decide to dispose of Greenleaf’s shares. |
| (13) |
Includes 237,428 shares which can be acquired upon exercise of warrants which can be exercised within sixty (60) days after September 29, 2004. |
| (14) |
Atlas Capital SA has the right to require two other stockholders to purchase all its common stock and warrants under certain circumstances. Refer to “Certain Relationships and Related Transactions” for a description of this put agreement. |
| (15) |
Does not include 75,000 shares subject to options which cannot be exercised within sixty (60) days after September 29, 2004. |
| (16) |
Includes 850,000 shares which can be acquired upon the exercise of options at any time within sixty (60) days after September 29, 2004 and does not include 250,000 shares subject to options which cannot be exercised within sixty (60) days after September 29, 2004. |
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Summary Compensation Table
The table below summarizes all compensation awarded to, earned by, or paid to those persons who in calendar year 2003 were our five highest-paid executive officers for all services rendered in all capacities to us for the calendar years listed below.
|
(1) |
The amounts of salary in the table above reflect amounts that accrued under an employment agreement. Because Michael Nouri agreed to allow Smart Online to defer part of his accrued compensation he received only the following amounts of salary: $35,000 in 2003, $26,250 in 2002, $37,500 in 2001, $150,000 in 2000 and $150,000 in 1999. Refer to “Certain Relationships and Interested Transactions” for a description of salary deferrals. |
|
(2) |
The amounts of salary in the table above reflect amounts that accrued under an employment agreement. Because Henry Nouri agreed to allow Smart Online to defer part of his accrued compensation he received only the following amounts of salary: $35,000 in 2003, $26,250 in 2002, $37,500 in 2001, $143,300 in 2000 and $89,300 in 1999. Refer to “Certain Relationships and Interested Transactions” for a description of salary deferrals. |
|
(3) |
The amounts of salary in the table above reflect amounts that accrued under an employment agreement. Because Ronna Loprete agreed to allow Smart Online to defer part of her accrued compensation she received only the following amounts of salary: $90,000 in 2003, $90,000 in 2002, $97,500 in 2001, $113,300 in 2000 and $80,000 in 1999. Refer to “Certain Relationships and Interested Transactions” for a description of salary deferrals. |
|
(4) |
The shares of restricted stock in the table above were purchased in 2001 at a purchase price of $0.02 per share, which Smart Online determined to be the fair market value of the shares at that time. |
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Aggregated Option Grants in Fiscal 2003 and Fiscal 2004 and Option Values at June 30, 2004
The following table provides information concerning unexercised options held as of June 30, 2004, by each of our executive officers:
|
Number of Securities
Underlying Unexercised Options at June 30, 2004 |
Value of Unexercised
In-the-Month Options at June 30, 2004 (1) |
|||||
|---|---|---|---|---|---|---|
|
Name |
Exercisable | Unexercisable | Exercisable | Unexercisable | ||
| Michael Nouri | 350,000 |
0 |
$907,500 | 0 | ||
| Henry Nouri | 350,000 |
0 |
$907,500 |
0 |
||
| Ronna Loprete | 75,000 |
0 |
$ 97,500 |
0 |
||
| Thomas Furr | 75,000 |
0 |
$ 97,500 |
0 |
||
| Anil Kamath | 0 | 75,000 | $ 0 | $375,000 | ||
| Tamir Sagie | 200,000 |
0 |
$260,000 |
0 |
||
| Jose Collazo | 0 | 75,000 | $ 0 |
$375,000 |
||
|
(1) |
Based on the last price at which Smart Online sold shares of Common Stock at $5.00 per share in September, 2004, minus the exercise price, multiplied by the number of shares issued upon the exercise of, or subject to, the option, without taking into account any taxes that may be payable in connection with the transaction. |
Option Grants During the First Six Months of Year 2004
The following options to purchase shares of our common stock were granted to executive officers during the six months ended June 30, 2004:
| Named Executive Officer |
Number of Shares
|
% of Total
|
Date of
|
Exercise
|
Expiration
|
||||||
|
Thomas Furr |
75,000 |
|
|
14.2 % |
02/05/04 |
$ 1.30 |
02/05/09 |
||||
| Ronna Loprete | 75,000 | 14.2 % | 02/05/04 | $ 1.30 | 02/05/09 | ||||||
| Anil Kamath | 75,000 | 14.2 % | 05/01/04 | $ 3.50 | 05/01/14 | ||||||
| Jose Collazo | 75,000 | 14.2 % | 05/01/04 | $ 3.50 | 05/01/14 | ||||||
The following options to purchase shares of our common stock were granted to executive officers during the year ended December 31, 2003:
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Employment Agreements
We have the following employment agreements with the five executive officers named in the compensation table above.
Michael Nouri. Effective April 1, 2004, covering employment commencing as of June 1, 2004 Smart Online and Michael Nouri entered into an employment agreement, which provided for an initial base salary of $170,000. The agreement replaced an employment agreement dated July 14, 1999 that was about to expire. The new agreement has a termination date of December 31, 2005, but it will be automatically extended for additional two-year terms, unless either Mr. Nouri or Smart Online provides the other with written notice of intention not to renew at least 180 days prior to the end of the term or the end of any renewal period. The agreement requires Smart Online to make a severance payment to Mr. Nouri in an amount equal to twelve months of base salary, if either Smart Online terminates Mr. Nouri’ s employment without “cause” (as defined in the agreement) or Mr. Nouri terminates his employment for “good reason” (as defined in the agreement). The agreement also contains a retention provision designed to incentivise Mr. Nouri to remain employed by Smart Online following a “change of control” as defined in the agreement. Under this retention provision, if Mr. Nouri remains employed by the surviving entity for a period of time after the change of control occurs designated by the Board of Directors of the surviving entity, and either his employment is terminated by the surviving entity without cause or by Mr. Nouri for good reason, the surviving entity must pay Mr. Nouri an amount equal to 299% of his highest annual salary and bonuses during the preceding five years. This retention payment is in addition to other severance payments described above. Mr. Nouri’s agreement contains non-competition and non-solicitation provisions. Refer to “Certain Relationships and Interested Transactions” for a description of the salary deferral and standstill agreements between Mr. Nouri and Smart Online, which continue in effect.
Henry Nouri. Effective April 1, 2004, covering employment commencing as of June 1, 2004 Smart Online and Henry Nouri entered into an employment agreement, which provided for an initial base salary of $150,000. The agreement replaced an employment agreement dated July 14, 1999 that was about to expire. The new agreement has a termination date of December 31, 2005, but it will be automatically extended for additional two-year terms, unless either Mr. Nouri or Smart Online provides the other with written notice of intention not to renew at least 180 days prior to the end of the term or the end of any renewal period. The agreement requires Smart Online to make a severance payment to Mr. Nouri in an amount equal to twelve months of base salary, if either Smart Online terminates Mr. Nouri’s employment without “cause” (as defined in the agreement) or Mr. Nouri terminates his employment for “good reason” (as defined in the agreement). The agreement also contains a retention provision designed to incentivise Mr. Nouri to remain employed by Smart Online following a “change of control” as defined in the agreement. Under this retention provision, if Mr. Nouri remains employed by the surviving entity for a period of time after the change of control occurs designated by the Board of Directors of the surviving entity, and either his employment is terminated by the surviving entity without cause or by Mr. Nouri for good reason, the surviving entity must pay Mr. Nouri an amount equal to 299% of his highest annual salary and bonuses during the preceding five years. This retention payment is in addition to other severance payments described above. Mr. Nouri’s agreement contains non-competition and non-solicitation provisions. Refer to “Certain Relationships and Interested Transactions” for a description of the salary deferral and standstill agreements between Mr. Nouri and Smart Online, which continue in effect.
Ronna Loprete . Effective April 1, 2004, covering employment commencing as of June 1, 2004 Smart Online and Ronna Loprete entered into an employment agreement which provided for an initial base salary of $120,000. The agreement replaced an employment agreement dated June 29, 1999 that was about to expire. The new agreement has a termination date of December 31, 2005, but it will be automatically extended for additional one-year terms, unless either Ms. Loprete or Smart Online provides the other with written notice of intention not to renew at least 30 days prior to the end of the term or the end of any renewal period. The agreement requires Smart Online to make a severance payment to Ms. Loprete in an amount equal to three months of base salary, if either Smart Online terminates Ms. Loprete’s employment without cause (as defined in the agreement) or Ms. Loprete terminates her employment for “good reason” (as defined in the agreement). Ms. Loprete’s agreement contains non-competition and non-solicitation provisions. Refer to “Certain Relationships and Interested Transactions” for a description of the salary deferral and standstill agreements between Ms. Loprete and Smart Online, which continue in effect.
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Jose Collazo . Effective May 1, 2004, covering employment commencing as of June 1, 2004 Smart Online and Jose Collazo entered into an employment agreement, which provided for an initial base salary of $120,000. The agreement replaced an employment agreement dated August 1, 2000 that would expire later this year. The new agreement has a termination date of December 31, 2005, but it will be automatically extended for additional one-year terms, unless either Mr. Collazo or Smart Online provides the other with written notice of intention not to renew at least 30 days prior to the end of the term or of any renewal period. The agreement requires Smart Online to make a severance payment to Mr. Collazo in an amount equal to three months of base salary, if either Smart Online terminates Mr. Collazo’ s employment without cause (as defined in the agreement) or Mr. Collazo terminates his employment for “good reason” (as defined in the agreement). Mr. Collazo’s agreement contains non-competition and non-solicitation provisions. The new agreement was accompanied by a grant of incentive stock options for seventy-five thousand (75,000) shares of common stock at an exercise price of three dollars and fifty cents ($3.50) vesting over a two (2) year period in four (4) equal installments and exercisable for nine (9) years and eleven (11) months. Option vesting is accelerated upon a change of control or corporate reorganization such that all options would vest immediately.
Anil Kamath . Effective May 1, 2004, covering employment commencing as of June 1, 2004 Smart Online and Anil Kamath entered into an employment agreement which provided for an initial base salary of $125,000. The agreement replaced an employment agreement dated October 16, 2000 that would expire later this year. The new agreement has a termination date of December 31, 2005, but it will be automatically extended for additional one-year terms, unless either Mr. Kamath or Smart Online provides the other with written notice of intention not to renew at least 30 days prior to the end of the term or of any renewal period. The agreement requires Smart Online to make a severance payment to Mr. Kamath in an amount equal to three months of base salary, if either Smart Online terminates Mr. Kamath’ s employment without cause (as defined in the agreement) or Mr. Kamath terminates his employment for “good reason” (as defined in the agreement). Mr. Kamath’s agreement contains non-competition and non-solicitation provisions. The new agreement was accompanied by a grant of incentive stock options for seventy-five thousand (75,000) shares of common stock at an exercise price of three dollars and fifty cents ($3.50) vesting over a two (2) year period in four (4) equal installments and exercisable for nine (9) years and eleven (11) months. Option vesting is accelerated upon a change of control or corporate reorganization such that all options would vest immediately.
Stock Option Grants to Senior Executives
None of the executive officers named above has exercised options to purchase shares of Smart Online’s common stock.
The foregoing option grants are subject to the terms and conditions of the three plans under which the options were granted. Set forth below is a summary of the terms of each of these plans. These are only summaries and do not include all the provisions of these plans, which can only be understood by reading the full plans.
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2004 Equity Compensation Plan
We adopted our 2004 Equity Compensation Plan as of March 31, 2004. The 2004 plan provides for the grant of options intended to qualify as “incentive stock options,” options that are not intended to so qualify or “nonstatutory stock options” and restricted stock and other direct stock awards. The total number of shares of common stock reserved for issuance under the 2004 plan is 5,000,000 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar capital change. At September 29, 2004, options to purchase 599,000 shares of our common stock were outstanding under the 2004 plan.
The plan is administered by our Board of Directors, which selects the eligible persons to whom options or stock awards shall be granted, determines the number of shares subject to each option or stock award, the exercise price therefore and the periods during which options are exercisable, interprets the provisions of the 2004 plan and, subject to certain limitations, may amend the 2004 plan. Each option or stock award granted under the 2004 plan shall be evidenced by a written agreement between Smart Online and the grantee. Grants may be made under the 2004 plan to employees (including officers) and directors of Smart Online as well as to certain consultants and advisors.
The exercise price for incentive stock options granted under the 2004 plan is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options granted under the 2004 plan have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of 5 years. Nonstatutory stock options granted under the 2004 plan have a term determined by the Board of Directors. Options granted under the 2004 plan are not transferable, except by will and the laws of descent and distribution.
2001 Equity Compensation Plan
We adopted our 2001 Equity Compensation Plan on May 31, 2001. The 2001 plan provides for the grant of options intended to qualify as “incentive stock options,” options that are not intended to so qualify or “nonstatutory stock options” and restricted stock. As of September 29, 2004, the total number of shares of our common stock reserved for issuance under the 2001 plan is 870,000 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change. Options to purchase 870,000 shares granted under the 2001 plan are outstanding at September 29, 2004, and Smart Online may not make any further grants under the 2001 plan.
The plan is administered by our Board of Directors, which selected the eligible persons to whom awards could be made, determined the number of shares subject to each option or stock award, the exercise price therefore and the periods during which the options were exercisable. The Board of Directors also interprets the provisions of the 2001 plan and, subject to certain limitations, may amend the 2001 plan. Each option or grant of restricted stock made under the 2001 plan is evidenced by a written agreement between Smart Online and the grantee. Grants could be made under the 2001 plan to employees, directors and certain consultants and advisors of Smart Online.
The exercise price for incentive stock options granted under the 2001 plan was required to be no less than the fair market value of the common stock on the date the option was granted, except for options granted to 10% stockholders, which were required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option was granted. Incentive stock options granted under the 2001 plan have a maximum term of 10 years, except for option grants to 10% stockholders, which were subject to a maximum term of 5 years. Nonstatutory stock options granted under the 2001 plan had a term determined by the Board of Directors. Options granted under the 2001 plan are not transferable, except by will and the laws of descent and distribution.
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1998 Stock Option Plan
We adopted our 1998 Stock Option Plan on November 12, 1998. The 1998 plan provides for the grant of options intended to qualify as “incentive stock options,” and options that are not intended to so qualify or “nonstatutory stock options.” As of September 29, 2004, the total number of shares of our common stock reserved for issuance under the 1998 plan is 288,900 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change. Options to purchase 288,900 shares have been granted under the 1998 plan and remain outstanding at September 29, 2004, and Smart Online may not make any further grants under the 1998 plan.
The plan is administered by our Board of Directors, which selected the eligible persons to whom awards could be made, determined the number of shares subject to each option or stock award, the exercise price therefore and the periods during which the options were exercisable. The Board of Directors also interprets the provisions of the 1998 plan and, subject to certain limitations, may amend the 1998 plan. Each option granted under the 1998 plan is evidenced by a written agreement between Smart Online and the optionee. Grants could be made under the 1998 plan to key employees, directors and independent contractors of Smart Online.
The exercise price for incentive stock options granted under the 1998 plan was required to be no less than the fair market value of the common stock on the date the option was granted, except for options granted to 10% stockholders, which were required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option was granted. Stock options granted under the 1998 plan have a maximum term of 10 years, except for incentive stock option grants to 10% stockholders, which were subject to a maximum term of 5 years. Options granted under the 1998 plan are not transferable, except by will and the laws of descent and distribution.
Board of Directors
All our Directors are officers of Smart Online. We do not pay these Directors any additional amounts for serving on our Board of Directors. We intend to recruit new Directors, who are not officers or employees of Smart Online, and when attractive candidates are identified and agree to become Directors. When we recruit independent directors for our Board, we will develop a compensation policy for independent Directors.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Our directors and officers are indemnified as provided by the Delaware Business Corporations Act (the “Delaware Corporations Act”) and our Certificate of Incorporation. We have been advised that in the opinion of the Securities and Exchange Commission indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court’s decision.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed below, none of the following persons has, since January 1, 2001, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us:
Loans, Salary Deferrals and Security Interests of Certain Officers, Employees and Relatives
During years 2001 through the beginning of 2004, while Smart Online was experiencing severe cash flow problems and was unable to raise sufficient capital, Smart Online substantially reduced expenses by laying off employees, terminating its lease, borrowing from certain officers and their relatives and deferring salary and commission payments to certain officers and employees. Smart Online believes all these transactions were made on terms no less favorable to Smart Online than could have been obtained from independent third parties in arms-length negotiations.
Smart Online continues to evaluate the need for these loans and deferrals. Since May 1, 2004, Smart Online has ceased deferring payment of new salary and commissions, because it believes it can obtain funds at less than the interest rate called for by these arrangements with officers and employees. Smart Online intends to repay all amounts as soon as funds not necessary to operate and grow its business become available to reduce the interest burden on Smart Online, notwithstanding that repayment is not due until December 31, 2005. Effective June 1, 2004, the officers and employees voluntarily reduced the interest rate on all these loans from 15% to 8% per annum. This was done, because the officers and employees believe the improved economic condition of Smart Online made Smart Online a better credit risk, which would warrant a lower interest rate in current market conditions.
Michael Nouri . From 2001 until 2003, Michael Nouri and a trust for the benefit of the children of Michael Nouri made loans to Smart Online in the amount of $174,572. These loans were repaid in part from June 2003 until October 2003 at which time $83,733 remained unpaid. From 1999 until 2001 Smart Online deferred making salary payments to Mr. Nouri totaling $296,667, which were due to him under his employment agreement dated July 14, 1999, which called for a base salary of $150,000 per year. Loans and deferrals earned interest at a rate of 15% compounded annually. In October 2003, Mr. Nouri agreed to continue to defer $9,583 of salary per month for salary that accrued after October 1, 2003. On October 15, 2003, Smart Online and Mr. Nouri entered into an agreement whereby all the loans and salary deferrals through October 1, 2003 were evidenced by promissory notes in the principal amount of $83,733 for loans made by Mr. Nouri and $358,229 for deferrals of salary that accrued prior to October 1, 2003. These notes, which remain unpaid, and all deferred salary bear 15% interest compounded annually (reduced to 8% effective June 1, 2004 as described above). The notes and all other obligations of Smart Online to Mr. Nouri arising out of loans and salary deferrals are secured by all the assets of Smart Online, which lien Mr. Nouri shares with Henry Nouri, Ronna Loprete, Thomas Furr and Eric Nouri to secure the obligations to them described below. The security interest was originally a second lien on all the assets, but with repayment of all amounts owed to the holder of the first lien, the security interest is now a first lien on all the assets of Smart Online. The notes are due upon demand, but Mr. Nouri has entered into standstill agreements not to demand payment until December 31, 2005. At June 30, 2004 principal and interest and the salary deferrals since October 1, 2003 owed to Mr. Nouri aggregated $337,383.
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Henry Nouri. From 1999 until 2004Smart Online deferred making salary payments to Mr. Nouri totaling $398,383, which were due to him under his employment agreement dated July 14, 1999, which called for a base salary of $150,000 per year. In October 2003, Mr. Nouri agreed to continue to defer $9,583 of salary per month for salary that accrued after October 1, 2003. Deferrals earned interest at a rate of 15% compounded annually. On October 15, 2003, Smart Online and Mr. Nouri entered into an agreement whereby all salary deferrals through October 1, 2003 were evidenced by a promissory note in the principal amount of $346,812 for deferrals of salary that accrued prior to October 1, 2003. This note, which remains unpaid, and all deferred salary bear 15% interest compounded annually (reduced to 8% effective June 1, 2004, as described above). The note and all other obligations of Smart Online to Mr. Nouri arising out of salary deferrals are secured by all the assets of Smart Online, which lien Mr. Nouri shares with Michael Nouri, Ronna Loprete, Thomas Furr and Eric Nouri to secure the obligations to them described herein. The security interest was originally a second lien on all the assets, but with repayment of all amounts owed to the holder of the first lien, the security interest is now a first lien on all the assets of Smart Online. The note is due upon demand, but Mr. Nouri has entered into standstill agreements not to demand payment until December 31, 2005. At June 30, 2004 principal and interest on the note and the salary deferrals since October 1, 2003 owed to Mr. Nouri aggregated $436,732.
Thomas Furr. From 2001 until 2004 Smart Online deferred making salary and commission payments to Thomas Furr totaling $117,810, which were due to him under his employment agreement dated September 11, 2001, which called for a base salary of $70,000 per year, plus 5% sales commissions. Deferrals earned interest at a rate of 15% compounded annually. In October 2003, Mr. Furr agreed to continue to defer all commissions per month for salary or commissions that accrue after October 1, 2003. On October 15, 2003, Smart Online and Mr. Furr entered into an agreement whereby all the loans and salary or commission deferrals through October 1, 2003 were evidenced by a promissory note in the principal amount of $114,190 for deferrals of salary that accrued prior to October 1, 2003. The note, which remains unpaid, and all deferred commissions bears 15% interest compounded annually (reduced to 8% effective June 1, 2004 as described above). The note and all other obligations of Smart Online to Mr. Furr arising out of salary or commission deferrals are secured by all the assets of Smart Online, which lien Mr. Furr shares with Michael Nouri, Henry Nouri, Ronna Loprete and Eric Nouri to secure the obligations to them described herein. The security interest was originally a second lien on all the assets, but with repayment of all amounts owed to the holder of the first lien, the security interest is now a first lien on all the assets of Smart Online. The notes are due upon demand, but Mr. Furr has entered into standstill agreements not to demand payment until December 31, 2005. At June 30, 2004 principal and interest on the note and the salary and commission deferrals since October 1, 2003 owed to Mr. Furr aggregated $129,604.
Ronna Loprete. From 2001 until 2004Smart Online deferred making salary payments to Ms. Loprete totaling $92,500, which were due to her under her employment agreement dated June 29, 1999, which called for a base salary of $80,000 per year. In October 2003, Ms. Loprete agreed to continue to defer $2,500 of salary per month for salary that accrued after October 1, 2003. Deferrals earned interest at a rate of 15% compounded annually. On October 15, 2003, Smart Online and Ms. Loprete entered into an agreement whereby all salary deferrals through October 1, 2003 were evidenced by a promissory note in the principal amount of $92,500 for deferrals of salary that accrued prior to October 1, 2003. This note, which remains unpaid, and all deferred salary bears 15% interest compounded annually (reduced to 8% effective June 1, 2004 as described above). The note and all other obligations of Smart Online to Ms. Loprete arising out of salary deferrals are secured by all the assets of Smart Online, which lien Ms. Loprete shares with Michael Nouri, Henry Nouri, Thomas Furr and Eric Nouri to secure the obligations to them described herein. The security interest was originally a second lien on all the assets, but with repayment of all amounts owed to the holder of the first lien, the security interest is now a first lien on all the assets of Smart Online. The notes are due upon demand, but Ms. Loprete has entered into standstill agreements not to demand payment until December 31, 2005. At June 30, 2004 principal and interest on the note and the salary deferrals since October 1, 2003 owed to Ms Loprete aggregated $101,505.
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Eric Nouri. From 2002 until 2004 Smart Online deferred making salary payments to Eric Nouri totaling $44,417, which were due to him under his employment agreement dated April 1, 2002. which called for a base salary of $60,000 per year. Deferrals earned interest at a rate of 15% compounded annually. Eric Nouri is the brother of officers and directors of Smart Online, Michael Nouri and Henry Nouri. In October 2003, Mr. Nouri agreed to continue to defer $2,500 of salary per month for salary that accrued after October 1, 2003. On October 15, 2003, Smart Online and Mr. Nouri entered into an agreement whereby all salary deferrals through October 1, 2003 were evidenced by a promissory note in the principal amount of $54,925 for deferrals of salary that accrued prior to October 1, 2003. This note, which remains unpaid, bear 15% interest compounded annually (reduced to 8% effective June 1, 2004 as described above). The note and all other obligations of Smart Online to Mr. Nouri arising out of salary deferrals are secured by all the assets of Smart Online, which lien Mr. Nouri shares with Michael Nouri, Henry Nouri, Ronna Loprete and Thomas Furr to secure the obligations to them described herein. The security interest was originally a second lien on all the assets, but with repayment of all amounts owed to the holder of the first lien, the security interest is now a first lien on all the assets of Smart Online. The note is due upon demand, but Mr. Nouri has entered into standstill agreements not to demand payment until December 31, 2005. At June 30, 2004 principal and interest on the note and the salary deferrals since October 1, 2003 owed to Mr. Nouri aggregated $48,797.
Tamir Sagie. Tamir Sagie was a consultant with and owns Nen, Inc. Nen, Inc. is a consultant to Smart Online and is paid at an annual rate of $70,000 per year in addition to Mr. Tagie's salary of $30,000. Nen, Inc. also had an equity interest in Smart IL, Ltd., from April 2002 to July 2003. Smart IL became an integration partner with Smart Online in August 2002 through the efforts of Nen, Inc. Mr. Sagie ended his consulting arrangement with Smart IL in August 2003 when he became an employee and officer of Smart Online. Mr. Sagie's shares in Smart IL were transferred back to the Smart IL at this time. In addition, Mr. Sagie owns 29.5% of Green Leaf Ventures, Ltd., and as such has a financial interest in the 1,448,618 Smart Online shares owned by Green Leaf Ventures. He is not an officer or director of Green Leaf Ventures.
William Furr. William Furr is the father of Thomas Furr, who is Vice President Sales and a Director of Smart Online, and the owner of 436,011 shares of Smart Online. William Furr loaned $50,000 to Smart Online on January 7, 2003, which was due July 2003. This loan was evidenced by a promissory note bearing interest at a rate of 6%. The loan was unsecured. On October 2, 2003, William Furr made an additional loan to Smart Online evidenced by a promissory note in the amount of $185,000 bearing interest at a rate of 15% compounded annually. As additional consideration for his loans, Smart Online issued Mr. Furr 150,000 shares of common stock. At that time, Mr. Furr extended the due date of the first loan and evidenced the loan extension with a second note in the amount of the $42,473 unpaid principal and interest from the first loan. The new note was also due May 13, 2004 and accrues 15% interest compounded annually. At the time of the second loan, Smart Online granted William Furr, a security interest in all the assets of Smart Online, which was a first priority lien to accrue all amounts owed to Mr. Furr. Smart Online repaid all amounts owed to William Furr on March 24, 2004.
Put Agreements In Connection With Private Placement Investor
Michael Nouri and Doron Roethler (“Grantors”) entered into a Put Agreements dated March 10, 2004 and August 13, 2004 with Atlas Capital, SA (“Atlas”). Smart Online is not a party to this agreement, but these agreements were entered into at the time of an investment in Smart Online by Atlas to provide comfort to Atlas that Smart Online would fulfill its promise to cause its common stock to become publicly traded. The Put Agreements give Atlas the right to require Mr. Nouri and Mr. Roethler to purchase for $3,270,000 all the 891,428 shares of common stock and warrants to purchase 188,571 shares of common stock Atlas purchased from Smart Online in March 2004 and August 2004. The Put Agreements can be exercised in the sole discretion of Atlas during the month of March 2005 or during the month of March 2006, but the Put Agreements terminate and the put options cannot be exercised after (i) the common stock of Smart Online is listed or quoted for pubic trading, or (ii) the stockholders of Smart Online vote to approve any action reasonably necessary to cause Smart Online stock to be publicly traded, but Atlas votes against the action, or (iii) Atlas transfers any of its common stock or warrants of Smart Online. The Put Agreements are not assignable and terminate if Atlas transfers the securities covered by the Put Agreements.
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Private Placement of Series A Preferred Stock to Existing Shareholder
On November 17, 2003 Smart Online sold 495,320 shares of its Series A Preferred Stock for $1.00 per share to Greenleaf Venture, Ltd, which prior to the time of the sale owned 350,000 shares of the common stock of Smart Online. As part of the purchase agreement, Greenleaf agreed it would not receive any cash payments from Smart Online if shares were converted to common stock in the corporate reorganization described below. Greenleaf is owned by Doron Roethler and Tamir Sagie, an officer of Smart Online. Mr. Roethler owns Smart IL, an Israeli company which has a contract with Smart Online to develop and co-own with Smart Online, an instant messengering program.
Corporate Reorganization
During the first quarter of 2004, Smart Online completed a corporate reorganization (the “Reorganization”) of its capital stock, which eliminated the Series A Preferred Stock of Smart Online. All holders of Series A Preferred Stock who participated in the reorganization by signing Reorganization, Lock-up Proxy and Release agreements dated January 1, 2004 (the “Reorganization Agreements”) received approximately 2.22 shares of common stock of Smart Online for each share of Series A Preferred Stock they held prior to the Reorganization and also received the right to receive cash payments from Smart Online equal to a percentage of the net proceeds Smart Online raises during calendar year 2004 from sales of equity securities and convertible debt securities in excess of $5 million of net proceeds. The percentage payable to participating holders of Series A Preferred Stock is as follows: (i) 20% of net proceeds between $5 million and $10 million of net proceeds, (ii) 30% of net proceeds between $10 million and $15 million of net proceeds, and (iii) 40% of net proceeds between $15 million and $20 million of net proceeds. As of September 27, 2004, we have raised approximately $4.6 million of net proceeds and have not made any payments to participating former holders of Series A Preferred Stock, because no payments have been due. In August 2004, the former holders of Series A Preferred Stock ratified their prior approval of the Reorganization.
Participating holders of Series A Preferred Stock who signed the Reorganization Agreements also agreed to subject approximately 90% of the common shares they received in the reorganization to transfer restrictions that include, among other restrictions, a “lock-up” agreement preventing the sale or transfer of the shares (other than transfers to certain related parties). The restrictions are effective through September 30, 2006, but commencing October 1, 2005 each holder subject to the provisions of the Lock-up Agreements may transfer up to 8.5% of such holder’s shares that are subject to the restrictions during each calendar month. The Reorganization Agreements also contained mutual releases by Smart Online and participating holders of Series A Preferred Stock.
Rescission Offer
On August 6, 2004, Smart Online made a rescission offer to shareholders who purchased 999,141 shares of common stock of Smart Online and warrants to acquire an additional 288,638 shares of common stock for $3.50 per share in a private placement conducted during March through June of 2004, in which Smart Online raised a total of $3,496,994. The rescission offer was made because in connection with the audit of its financial statements and due diligence review of information in connection with preparing the registration statement of which this Prospectus is a part, Smart Online identified certain inaccuracies and omissions in the information it provided to investors in the private placement. Upon identifying such inaccuracies and omissions, Smart Online made the rescission offer and disclosed the inaccuracies and omissions to all investors who purchased shares in the private placement. In the rescission offer, Smart Online offered to repurchase all the shares and warrants sold in the private placement for the original purchase price, plus interest, and afforded shareholders a thirty-day period in which to accept the rescission offer. One shareholder accepted the rescission offer and Smart Online paid that shareholder $102,610.27 as payment in full of the purchase price and interest. No other shareholders accepted the rescission offer and all shareholders to whom the offer was made executed and delivered releases for any potential liabilities arising out of disclosures made by Smart Online in the private placement.
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Shares Issued in Pursuant to Registration Rights Agreement
In connection with the private placement conducted during March through June of 2004, Smart Online and the investors executed registration rights agreements. This registration rights agreement required Smart Online to pay investors 2% of their investment for each thirty-day period after June 30, 2004 in which Smart Online failed to file a registration statement registering shares sold in the private placement, which amount is prorated for partial 30-day periods. The registration rights agreements provided that Smart Online could choose to pay this by issuing shares of its common stock in lieu of cash, which Smart Online chose to do. On September 29, 2004, Smart Online issued 58,226 shares of its common stock to satisfy amounts that accrued through September 29, 2004 at the rate of one share for each $3.50 of accrued liability. These shares are included in the shares being registered in this offering.
Exchange of Bank One Warrant
In 2001, Smart Online issued to Bank One, N.A., a warrant to purchase 619,309 shares of the common stock of Smart Online for an exercise price of $18.00 per share in connection with Smart Online and Bank One entering into a syndication partnering agreement. The warrant contained a weighted average anti-dilution provision, which caused the exercise price of the warrant to decrease to approximately $12.04 per share and the number of shares issuable upon exercise of the warrant to increase to approximately 925,789 shares of common stock as of August 1, 2004. To simplify its capital structure, Smart Online offered to issue shares of common stock of Smart Online to Bank One in exchange for cancellation of the warrant. On September 3, 2004, Bank One exchanged the warrant for 100,000 shares of common stock of Smart Online, which shares were issued to J P Morgan Chase & Co., an affiliate of Bank One. These shares are included in the shares being registered in this offering.
Private Placement
During August through September 27, 2004, Smart Online sold 290,000 shares of its common stock to investors in a private placement for a price of $5.00 per share, for an aggregate of $1,450,000. These shares are included in the shares being registered in this offering.
Revenue and Expense Transactions
Refer to “Management’s Discussion and Analysis of Financial Performance and Results of Operations – Revenue from Related Parties” and Notes to Financial Statements for a description of related party transactions with companies that resulted in Smart Online receiving revenue or incurring expenses.
Stock Sales to Insiders
The following table summarizes sales by us of our common stock since inception to our executive officers, directors and persons who currently own five percent or more of our total voting securities. These transactions do not include grants of stock options which are disclosed in “Executive Compensation.”
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|
Shares of
|
Total
|
Date of
|
||||
|
American Investment Holding Group, Inc. |
3,000,000 |
|
$ 644,789 |
|
12/16/1996 |
|
| American Investment Holding Group, Inc. | 25,000 | 2,500 | 3/30/1998 | |||
| American Investment Holding Group, Inc. | 19,000 | 1,900 | 5/22/1998 | |||
| Charter Holding, LLC | 200,000 | 1,000,000 | 11/2/1998 | |||
| Charter Holding, LLC | 172,200 | 861,000 | 11/12/1998 | |||
| Charter Holding, LLC | 100,000 | 500,000 | 12/24/1998 | |||
| Charter Holding, LLC | 46,578 | 232,890 | 2/25/1999 | |||
| Charter Holding, LLC | 6000 | 30,000 | 3/8/1999 | |||
| Charter Holding, LLC | 13,000 | 65,000 | 3/17/1999 | |||
| Charter Holding, LLC | 337,092 | 1,685,460 | 6/29/1999 | |||
| Ronna Loprete | 250,000 | 5,000 | 4/1/2002 | |||
| Anil Kamath | 200,000 | 4,000 | 4/1/2002 | |||
| Jose Collazo | 200,000 | 4,000 | 4/1/2002 | |||
| Thomas Furr | 40,000 | 800 | 4/1/2002 | |||
| Thomas Furr | 60,000 | 1,200 | 4/1/2002 | |||
| Atlas Capital | 628,571 | 2,200,000 | 3/22/2004 | |||
| Atlas Capital | 162,857 | 570,000 | 5/24/2004 | |||
| Atlas Captial | 100,000 | $ 500,000 | 8/30/2004 |
Greenleaf Ventures purchased 495,319 shares of our Series A Preferred Stock from us on November 17, 2003 for $495,320. These shares were exchanged for 1,098,619 shares of our Common Stock in the reorganization that occurred in the first quarter of 2004.
Sales and Transfers of Stock by our Executive Officers
From our inception in August 1993 to date, Mr. Nouri, our Chief Executive Officer and the Chairman of our Board of Directors, has purchased an aggregate of 3,919,743 shares of our stock from Smart Online and 550,000 shares from other shareholders of Smart Online. To date, Mr. Nouri, through his companies, Charter Holding, LLC and American Investment Holding Group, Inc., has sold a total of 1,306,116 shares of his common stock in private transactions at prices ranging from $.08 to $10.00 per share. Of the total number of shares sold by Mr. Nouri directly or through Charter Holding, LLC, 198,600 shares were to persons who, either at the time of the sale were or thereafter became, employees or directors of Smart Online, and the remaining shares were sold to others. These transactions occurred as follows:
In March 2000, Charter Holding, LLC sold 95,000 shares of Common Stock to someone who later became an officer of Smart Online, 55,000 shares of Common Stock to the relative of such officer and 49,000 shares of Common Stock to an unrelated third party at a price of $1.00 per share.
In January 2001, Charter Holding sold 33,600 shares of Common Stock to a consultant who later became an officer of Smart Online at a price of $.08 per share.
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In April 2001, Charter Holding sold 23,000 shares of Common Stock to unrelated third parties at a price of $10.00 per share. The shares are held in a voting trust for which Michael Nouri is the trustee. The purchasers have no voting power with respect to these shares.
In November 2002, Michael Nouri purchased 200,000 shares of Common Stock from a shareholder of Smart Online at a price of $0.175 per share.
In November 2002, Michael Nouri sold 100,000 shares of Common Stock to unrelated third parties at a price of $0.30 per share.
In March 2003, Charter Holding sold 240,000 shares of Common Stock to Doron Roethler, who owns a company that does business with Smart Online, at a price of $1.04 per share.
In April 2003, Charter Holding sold 70,000 shares of Common Stock to an officer of Smart Online at a price of $0.45 per share.
In May 2003, Michael Nouri purchased 250,000 shares of Common Stock from a shareholder of Smart Online at a price of $0.32 per share.
In May 2003, Charter Holding sold 250,000 shares of Common Stock to Greenleaf Ventures at a price of $1.00 per share.
In November 2003, Michael Nouri purchased 100,000 shares of Common Stock from a shareholder of Smart Online at a price of $0.23 per share.
In November 2003, Charter Holding sold 100,000 shares to Greenleaf Ventures for a price of $1.00 per share.
In December 2003, Charter Holding sold 121,116 shares of Common Stock to an unrelated third party at a price of $1.00 per share.
In December 2003, Charter Holding sold 150,000 shares of Common Stock to an unrelated third party at a price of $2.25 per share. In December 2003, Charter Holding sold 20,000 shares of Common Stock to an unrelated third party at a price of $2.50 per share.
In 1998, Mr. Nouri, through American Investment Holding Group, Inc., gifted total of 34,000 common shares of Smart Online to unrelated third party.
Our authorized capital stock currently consists of 45,000,000 shares of Common Stock, par value $0.001 per share, of which 11,629,372 shares are issued and outstanding as of September 29, 2004, and 5,000,000 shares of preferred stock, par value $0.001 per share, of which no shares are issued and outstanding, the rights and preferences of which may be established from time to time by our Board of Directors.
The following description of our securities contains all material information. However, the description of our securities contained herein is a summary only and may be exclusive of certain information that may be important to you. For more complete information, you should read our Certificate of Incorporation together with our corporate bylaws.
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Common Stock
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Such holders do not have cumulative voting rights. Subject to preferences that may be applicable to any shares of preferred stock outstanding at the time, holders of our common stock are entitled to receive any dividends, if any, that may be declared from time to time by our Board of Directors out of funds legally available therefor on a pro rata basis.
Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive our net assets ratably, after the payment of:
| i. |
all secured liabilities, including any then outstanding secured debt securities which we may have issued as of such time; |
| ii. |
all unsecured liabilities, including any then unsecured outstanding debt securities which we have issued as of such time; and |
| iii. |
all liquidation preferences on any then outstanding preferred stock. |
Holders of our common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Our Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions applicable to such shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series. Such shares may have rights senior to our common stock. The issuance of preferred stock may have the effect of delaying or preventing a change in control of Smart Online. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. At present, we have no plans to issue any shares of our preferred stock; however, we may have to issue preferred stock in order to raise additional capital. Refer to CAPITAL REQUIREMENTS under MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Warrants
We have outstanding warrants, issued in connection with the private placement of our common stock in 2004, to purchase up to 631,138 shares of our common stock at an exercise price of $3.50 per share at any time or from time to time on or before dates during 2014, as set forth in the respective warrant instrument. Of these warrants, 281,138 were issued to investors and 350,000 to a financial advisor.
All of our warrants contain a “cashless exercise” feature such that warrants may be exercised by means of a cashless exercise in which the warrant holders will be entitled to receive a stock certificate for the number of shares of our common stock equal to the quotient obtained by dividing [(A-B)(X)] by (A) where
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| X | = | the number of shares issuable upon exercise of the warrants |
| A | = | the value of a share of our common stock on the date of exercise |
| B | = | the exercise price of the warrants |
Options
At September 29, 2004 we had outstanding options to purchase an aggregate of 1,907,900 shares of common stock to our officers, directors, employees and consultants with a weighted average exercise price of $2.52 per share. These options include 1,757,900 options that were issued under our stock plans and an additional 150,000 options that were issued outside any plan. These options typically vest over a 5-year period. These options were granted under the three plans described below.
All outstanding options under our stock plans provide for anti-dilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits and other changes in our capital or corporate structure.
2004 Equity Compensation Plan
We adopted our 2004 Equity Compensation Plan as of March 31, 2004. The 2004 plan provides for the grant of options intended to qualify as “incentive stock options,” options that are not intended to so qualify or “nonstatutory stock options” and restricted stock and other direct stock awards. The total number of shares of common stock reserved for issuance under the 2004 plan is 5,000,000 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar capital change. At September 29, 2004, options to purchase 599,000 shares of our Common Stock were outstanding under the 2004 plan.
The plan is administered by our Board of Directors, which selects the eligible persons to whom options or stock awards shall be granted, determines the number of shares subject to each option or stock award, the exercise price therefore and the periods during which options are exercisable, interprets the provisions of the 2004 plan and, subject to certain limitations, may amend the 2004 plan. Each option or stock award granted under the 2004 plan shall be evidenced by a written agreement between Smart Online and the grantee.
Grants may be made under the 2004 plan to employees (including officers) and directors of Smart Online as well as to certain consultants and advisors. The exercise price for incentive stock options granted under the 2004 plan is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options granted under the 2004 plan have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of 5 years. Nonstatutory stock options granted under the 2004 plan have a term determined by the Board of Directors. Options granted under the 2004 plan are not transferable, except by will and the laws of descent and distribution.
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2001 Equity Compensation Plan
We adopted our 2001 Equity Compensation Plan on May 31, 2001. The 2001 plan provides for the grant of options intended to qualify as “incentive stock options,” options that are not intended to so qualify or “nonstatutory stock options” and restricted stock. The total number of shares of our common stock reserved for issuance under the 1998 plan is 2,263,500 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change. Options to purchase 870,000 shares and grants of 1,393,500 restricted stock totaling 2,263,500 shares have been granted under the 2001 plan and remain outstanding at September 29, 2004, and Smart Online may not make any further grants under the 2001 plan.
The plan is administered by our Board of Directors, which selected the eligible persons to whom awards could be made, determined the number of shares subject to each option or stock award, the exercise price therefore and the periods during which the options were exercisable. The Board of Directors also interprets the provisions of the 2001 plan and, subject to certain limitations, may amend the 2001 plan. Each option or grant of restricted stock made under the 2001 plan is evidenced by a written agreement between Smart Online and the grantee. Grants could be made under the 2001 plan to employees, directors and certain consultants and advisors of Smart Online.
The exercise price for incentive stock options granted under the 2001 plan was required to be no less than the fair market value of the common stock on the date the option was granted, except for options granted to 10% stockholders, which were required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option was granted. Incentive stock options granted under the 2001 plan have a maximum term of 10 years, except for option grants to 10% stockholders, which were subject to a maximum term of 5 years. Nonstatutory stock options granted under the 2001 plan had a term determined by the Board of Directors. Options granted under the 2001 plan are not transferable, except by will and the laws of descent and distribution.
1998 Stock Option Plan
We adopted our 1998 Stock Option Plan on November 12, 1998. The 1998 plan provides for the grant of options intended to qualify as “incentive stock options,” and options that are not intended to so qualify or “nonstatutory stock options.” The total number of shares of our common stock reserved for issuance under the 1998 plan is 488,900 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change. Options to purchase 288,900 shares have been granted under the 1998 plan and remain outstanding at September 29, 2004, and Smart Online may not make any further grants under the 1998 plan.
The plan is administered by our Board of Directors, which selected the eligible persons to whom awards could be made, determined the number of shares subject to each option or stock award, the exercise price therefore and the periods during which the options were exercisable. The Board of Directors also interprets the provisions of the 1998 plan and, subject to certain limitations, may amend the 1998 plan. Each option granted under the 1998 plan is evidenced by a written agreement between Smart Online and the optionee. Grants could be made under the 1998 plan to key employees, directors and independent contractors of Smart Online.
The exercise price for incentive stock options granted under the 1998 plan was required to be no less than the fair market value of the common stock on the date the option was granted, except for options granted to 10% stockholders, which were required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option was granted. Stock options granted under the 1998 plan have a maximum term of 10 years, except for incentive stock option grants to 10% stockholders, which were subject to a maximum term of 5 years. Options granted under the 1998 plan are not transferable, except by will and the laws of descent and distribution.
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Reports to Stockholders
We intend to furnish our stockholders with annual reports containing audited financial statements as soon as practical after the end of each fiscal year. Our fiscal year ends December 31.
Transfer Agent
We intend to appoint a transfer agent for our common stock before this registration statement becomes effective.
Market Information
There is no public trading market on which our common stock is traded. We intend to engage a broker-dealer who will file a Form 211 with the National Association of Securities Dealers (“NASD”) to allow the quote of our common stock on the OTCBB. There is no assurance that our common stock will be included for quotation on the OTCBB.
At September 29, 2004, there were approximately 160 record holders of our common stock. We have outstanding 11,629,372 shares of common stock as of September 29, 2004 and warrants to purchase 631,138 shares of common stock and options. Options to purchase 1,907,900 shares of common stock were also outstanding at September 29, 2004. Of these shares, 1,418,855 outstanding shares are being registered for resale pursuant to this registration statement and will be freely tradable without restriction under the Securities Act. In addition, 281,138 shares issuable upon exercise of warrants are being registered for resale pursuant to this registration statement and will be freely tradable without restriction under the Securities Act. The remaining shares will be eligible for sale in the public market, subject to certain volume limitations and the expiration of applicable holding periods under Rule 144, when Rule 144 becomes available to security holders of Smart Online after the effective date of this registration statement of which this prospectus is a part. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned restricted shares for at least one year (including the holding period of any prior owner or affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed (i) 1% of the number of shares of common stock then outstanding, or (ii) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate of Smart Online within the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate) is entitled to sell such shares without complying with the manner of sale, public information, volume limitations or notice provisions of Rule 144. Non-affiliates (which we define as all persons or entities other than our officers and directors or entities controlled by our officers or directors) currently hold 7,500,377 shares of our common stock, which is approximately 65% of our outstanding shares, which numbers do not include outstanding warrants or options.
Lock-up Agreements Applicable to Certain Holders of our Common StockMost of our security holders have signed lock-up agreements (the “Lock-up Agreements”) that restrict the sale of 9,398,667 shares of the 11,629,372 issued and outstanding shares of Common Stock, 1,547,500 shares of the 1,907,900 shares issuable upon exercise of outstanding options. These transfer restrictions include, among other restrictions, a “lock-up” agreement preventing the sale or transfer of the shares (other than transfers to certain related parties). The restrictions are effective through September 30, 2006, but commencing October 1, 2005 each holder subject to the provisions of the Lock-up Agreements may transfer up to 8.5% of such holder’s shares of Common Stock during each calendar month.
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These Lock-up Agreements cover all the shares of the Common Stock, options and warrants held by our officers and directors.
The Selling Security Holders, who hold 1,418,795 shares of our common stock as well as warrants to acquire up to an additional 281,138 shares of our common stock, are subject to transfer restrictions set forth in the respective subscription agreements between Smart Online and each such Selling Security Holder. The provisions of the Subscription Agreements restrict the sale or transfer, other than certain transfers to related parties, of the shares of common stock acquired pursuant to the Subscription Agreement (including, with respect to those Selling Security Holders who hold warrants to acquire shares of our common stock, the shares of common stock to be acquired upon any exercise of the warrants.) These transfer restrictions include, among other restrictions, a “lock-up” agreement that expires 18 months from the effective date of this registration statement. Under these agreements, each Selling Security Holder may sell or transfer up to one-third of such Selling Security Holder’s shares of our common stock in any rolling 30-day period prior to the termination of the lock-up period.
We can offer no assurance that an active public market in our shares will develop. Future sales of substantial amounts of our shares in the public market could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.
The Securities Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the OTC Bulletin Board system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system.)
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which:
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The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer:
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling those securities.
Certain legal matters, including the legality of the issuance of shares of common stock offered herein, are being passed upon by us by our counsel, Daniels Daniels & Verdonik, P.A., 1822 NC Highway 54, Suite 200, Durham, North Carolina 27713, who are also representing us in connection with the filing of the Registration Statement of which this Prospectus is a part.
The audited financial statements of Smart Online for the years ended December 31, 2002, and December 31, 2003 have been included herein and in the registration statement in reliance upon the report of BDO Seidman, LLP, independent registered public accountants, appearing elsewhere herein, and upon the authority of that firm as experts in accounting and auditing. The opinion of BDO Seidman, LLP has expressed substantial doubt about our ability to continue as a going concern.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been required to comply with the reporting requirements of the Securities Exchange Act. We have filed with the SEC a registration statement on Form SB-2 to register the securities offered by this prospectus. This prospectus is part of the registration statement, and as permitted by the SEC’s rules, does not contain all of the information in the registration. For future information about us and the securities offered under this prospectus, you may refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. You can review the registration statement and its exhibits at the public reference facility maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The registration statement is also available electronically on the World Wide Web at http://www.sec.gov .
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BACK COVER PAGE OF PROSPECTUS
No person is authorized to give any information or to make any representation other than those contained in this prospectus, and if made such information or representation must not be relied upon as having been given or authorized. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the securities offered by this prospectus or an offer to sell or a solicitation of an offer to buy the securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any implication that there have been no changes in the affairs of the Company since the date of this prospectus. However, in the event of a material change, this prospectus will be amended or supplemented accordingly.
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SMART ONLINE, INC.
FINANCIAL
STATEMENTS
TABLE
OF CONTENTS
|
PAGE |
|
|---|---|
|
F - 2 |
|
| Financial Statements: | |
|
Balance Sheets
as of June 30, 2004 (unaudited), December 31, 2003 and
|
F - 3 |
|
Statements of Operations
for the six month periods ended June 30, 2004 and 2003
|
F - 4 |
|
Statements of Cash Flows
for the six month periods ended June 30, 2004 and 2003
|
F - 5 |
|
Statements of Stockholders’ Deficit
for the six month period ended June 30, 2004
|
F - 6 |
|
Notes to Financial Statements |
F - 7 |
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Smart Online, Inc.
Durham, North Carolina
We have audited the accompanying balance sheets of Smart Online, Inc. as of December 31, 2003 and 2002 and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smart Online, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and at December 31, 2003 had deficiencies in working capital and equity that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Signed BDO Seidman, LLP
High Point, North Carolina
July 21, 2004, except for Note 13, which is as of September 10, 2004
F-2
|
Assets
|
JUNE 30,
2004 (unaudited) |
DECEMBER 31,
|
DECEMBER 31,
2002 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 322,065 | $ | 101,486 |
$ |
26,940 | |||||
| Accounts receivable, net | 52,856 |
|
82,576 | 82,600 | |||||||
| Receivable from related party | – | 38,682 | – | ||||||||
| Other accounts receivable | 13,750 | – | – | ||||||||
| Prepaid expenses | 17,116 | – | – | ||||||||
| Total current assets | 405,787 | 222,744 | 109,540 | ||||||||
|
PROPERTY, PLANT AND EQUIPMENT, net |
|
|
|
53,840 |
|
|
48,947 |
|
|
107,211 |
|
| INTANGIBLE ASSETS, net | 18,923 | 20,987 | 20,086 | ||||||||
| OTHER ASSETS | 13,394 | 13,394 | 15,742 | ||||||||
| TOTAL ASSETS | $ | 491,944 | $ | 306,072 |
$ |
252,579 | |||||
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable | $ | 329,568 | $ | 507,656 |
$ |
1,021,189 | |||||
| Accrued payroll | 92,850 | 63,133 | 90,288 | ||||||||
| Notes payable to affiliates | – | 350,000 | 170,000 | ||||||||
| Accrued payroll taxes, penalties and interest | 476,555 | 1,442,061 | 1,152,958 | ||||||||
| Accrued interest payable | 85,835 | 220,833 | 123,632 | ||||||||
| Loan from shareholder | – | 86,480 | 46,794 | ||||||||
| Obligation to common stockholders | 3,333,643 | – | – | ||||||||
| Deferred revenue | 580,719 | 947,640 | 1,214,966 | ||||||||
| Accrued rent payable | – | – | 50,000 | ||||||||
| Total current liabilities | 4,899,170 | 3,617,803 | 3,869,827 | ||||||||
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
| Legal settlement obligation | – | 181,563 | 282,500 | ||||||||
| Deferred compensation, notes payable | 1,087,991 | 1,011,648 | 676,425 | ||||||||
| Total long-term liabilities | 1,087,991 | 1,193,211 | 958,925 | ||||||||
| Total liabilities | 5,987,161 | 4,811,014 | 4,828,752 | ||||||||
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Preferred stock - Series A, $.001 par value, |
|
|
|
– |
|
|
17,509,214 |
|
|
14,692,150 |
|
| 5,000,000 shares authorized, shares issued and | |||||||||||
| outstanding:2004 — 0, 2003 — 1,361,614 and 2002 — 866,295 | |||||||||||
|
STOCKHOLDERS' DEFICIT: |
|||||||||||
| Common stock, $.001 par value, 45,000,000 shares | 9,915 | 7,262 | 7,037 | ||||||||
| authorized, shares issued and outstanding: | |||||||||||
| 2004 - 9,913,742.77, 2003 -7,261,964.77, | |||||||||||
| and 2002 - 7,036,964.77 | |||||||||||
| Additional paid-in capital | 25,854,954 | 8,112,393 | 9,299,678 | ||||||||
|
Accumulated deficit |
|
|
|
(31,360,086 |
) |
|
(30,133,811 |
) |
|
(28,575,038 |
) |
| Total stockholders' deficit | (5,495,217 | ) | (22,014,156 | ) | (19,268,323 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 491,944 | $ | 306,072 |
$ |
252,579 | |||||
See notes to financial statements.
F-3
|
6 Months Ended
JUNE 30, 2004 (unaudited) |
6 Months
Ended JUNE 30, 2003 (unaudited) |
Year Ended
DECEMBER 31, 2003 |
Year Ended
DECEMBER 31, 2002 |
|||||||||||
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Integration fees |
$ |
420,178 |
$ |
411,622 |
$ |
710,474 |
$ |
869,132 | ||||||
| Syndication fees | 65,780 | 57,772 | 115,544 | 202,368 | ||||||||||
| OEM revenue | 28,435 | 24,310 | 48,620 | 43,608 | ||||||||||
| Web services | 34,990 | 115,943 | 207,570 | 241,420 | ||||||||||
| Other revenues | 1,986 | 155,586 | 179,015 | 35,117 | ||||||||||
| Total revenues | 551,369 | 765,233 |
1,261,223 |
1,391,645 |
||||||||||
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Compensation expense | 790,584 | 543,355 | 1,612,268 | 1,238,740 | ||||||||||
| Employee benefits | 78,596 | 69,896 | 142,339 | 132,163 | ||||||||||
| Other employee costs | 47,762 | 20,994 | 41,029 | 39,023 | ||||||||||
| Advertising and marketing | 77,992 | 8,550 | 15,838 | 38,076 | ||||||||||
| Consulting expense | 203,866 | 51,500 | 587,112 | 2,000 | ||||||||||
| Depreciation | 20,015 | 29,927 | 59,852 | 242,877 | ||||||||||
| Rent & facilities costs | 85,998 | 68,738 | 148,584 | 157,762 | ||||||||||
| Legal & professional fees | 330,300 | 149,382 | 355,226 | 318,889 | ||||||||||
| Penalties | 38,369 | 53,182 | 108,170 | 110,197 | ||||||||||
| Other operating expenses | 38,960 | 25,090 | 56,087 | 111,683 | ||||||||||
|
Total operating expenses |
|
|
|
1,712,442 |
|
|
1,020,614 |
|
|
3,126,505 |
|
|
2,391,410 |
|
|
LOSS FROM OPERATIONS |
|
|
|
(1,161,073 |
) |
|
(255,381 |
) |
|
(1,865,282 |
) |
|
(999,765 |
) |
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
(114,597 |
) |
|
(48,928 |
) |
|
(186,248 |
) |
|
(89,912 |
) |
| Gain on debt forgiveness | 49,395 | 194,771 | 492,757 | 338,866 | ||||||||||
| Loss on disposal of asset | – | – | – | (54,595 | ) | |||||||||
| Total other income (expense) | (65,202 | ) | 145,843 |
306,509 |
194,359 |
|||||||||
|
NET LOSS |
|
|
|
(1,226,275 |
) |
|
(109,538 |
) |
|
(1,558,773 |
) |
|
(805,406 |
) |
|
Preferred
stock dividends and
|
|
|
|
(2,215,625) |
|
|
(480,000) |
|
|
(2,321,744) |
|
|
(961,200) |
|
|
Net loss
attributed to
|
|
|
$ |
(3,441,900) |
|
$ |
(589,538) |
|
$ |
(3,880,517) |
|
$ |
(1,766,606) |
|
|
NET LOSS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributed to common
|
|
|
$ |
(0.40 |
) |
$ |
(0.08 |
) |
$ |
(0.53 |
) |
$ |
(0.25 |
) |
|
SHARES USED IN COMPUTING NET |
||||||||||||||
| LOSS PER SHARE: | ||||||||||||||
|
Basic and Diluted |
|
|
|
8,680,568 |
|
|
7,053,510 |
|
|
7,254,978 |
|
|
7,181,759 |
|
See notes to financial statements.
F-4
|
6
Months
Ended JUNE 30, 2004 (unaudited) |
6
Months
Ended JUNE 30, 2003 (unaudited) |
Year Ended
DECEMBER 31, 2003 |
Year Ended
DECEMBER 31, 2002 |
|||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||
| Net loss | $ | (1,226,275 | ) |
$ |
(109,538 | ) |
$ |
(1,558,773 | ) |
$ |
(805,406 | ) | ||
| Adjustments to reconcile net loss to net | ||||||||||||||
| cash provided by (used in) operating | ||||||||||||||
| activities: | ||||||||||||||
| Depreciation | 20,015 | 29,927 | 59,852 | 242,877 | ||||||||||
| Loss on disposal of property and equipment | – | – | – | 54,595 | ||||||||||
|
Common shares
or options issued in lieu of
compensation |
161,000 | – | 1,010,109 | 50,159 | ||||||||||
| Common shares issued for extension of loan | 75,000 | 75,000 | 75,000 | – | ||||||||||
| Gain on return of common shares | – | – | – | (105,000) | ||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | 29,720 | 11,793 | 24 | 275,876 | ||||||||||
| Related party receivable | 38,682 | – | (38,682 | ) | – | |||||||||
| Other accounts receivable | (13,750 | ) | – | – | – | |||||||||
| Prepaid expenses | (17,116 | ) | – | – | – | |||||||||
| Other assets | 2,064 | (4,206 | ) | 1,447 | (9,265 | ) | ||||||||
| Legal settlement obligation | (181,563 | ) | 346,772 | (100,937 | ) | |||||||||
| Deferred revenue | (366,921 | ) | (250,893 | ) | (267,326 | ) | 589,492 | |||||||
| Cash overdraft | – | – | – | (152,405 | ) | |||||||||
| Accounts payable | (178,088 | ) | (440,561 | ) | (513,533 | ) | (989,277 | ) | ||||||
| Accrued payroll | 29,717 | (28,100 | ) | (27,155 | ) | 14,627 | ||||||||
| Accrued payroll taxes payable | (965,506 | ) | 108,367 | 289,103 | 477,567 | |||||||||
| Accrued interest payable | (134,998 | ) | 39,240 | 97,201 | 70,442 | |||||||||
| Accrued rent payable | – | (50,000 | ) | (50,000 | ) | (73,759 | ) | |||||||
| Deferred compensation payable | 76,343 | 136,229 | 335,223 | 360,375 | ||||||||||
| Net cash (used in) provided by operating | ||||||||||||||
| activities | (2,651,676 | ) | (135,970 | ) |
(688,447 |
) |
898 |
|||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Purchase of furniture, equipment and | ||||||||||||||
| Leasehold improvements | (24,908 | ) | – | (1,588 | ) | (66,755 | ) | |||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on notes payable |
|
|
|
– |
|
|
– |
|
|
190,000 |
|
|
270,000 |
|
|
Repayments on notes payable |
|
|
|
(350,000 |
) |
|
(5,000 |
) |
|
(10,000 |
) |
|
(225,000 |
) |
|
Proceeds from common stock subject to rescission |
|
|
|
3,333,643 |
|
|
– |
|
|
– |
|
|
– |
|
|
Borrowings from stockholder |
|
|
|
(86,480 |
) |
|
162,728 |
|
|
39,686 |
|
|
27,653 |
|
|
Issuance of common and preferred stock |
|
|
|
– |
|
|
(25,501 |
) |
|
544,895 |
|
|
20,144 |
|
|
Net cash provided by financing activities |
|
|
|
2,897,163 |
|
|
132,227 |
|
|
764,581 |
|
|
92,797 |
|
|
NET INCREASE
(DECREASE) IN CASH
|
|
|
|
220,579 |
|
|
(3,743 |
) |
|
74,546 |
|
|
26,940 |
|
|
CASH AND CASH EQUIVALENTS,
|
|
|
|
101,486 |
|
|
26,940 |
|
|
26,940 |
|
|
– |
|
|
CASH AND CASH EQUIVALENTS,
|
|
|
$ |
322,065 |
|
$ |
23,197 |
|
$ |
101,486 |
|
$ |
26,940 |
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash payment during the year for interest: | $ | 249,595 | $ | 9,688 |
$ |
89,047 |
$ |
19,469 | ||||||
|
Non-cash financing activities: |
||||||||||||||
|
Non-cash accretion of preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock redemption value |
|
|
$ |
2,215,625 |
|
$ |
480,000 |
|
$ |
2,321,744 |
|
$ |
961,200 |
|
|
Conversion of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
into common stock |
|
|
$ |
19,724,839 |
|
$ |
– |
|
$ |
– |
|
$ |
– |
|
See notes to financial statements.
F-5
SMART ONLINE,
INC.
STATEMENTS OF
STOCKHOLDERS’ DEFICIT
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
|
Common
Stock $.001 Par |
Additional
Paid- In Capital |
Accumulated
Deficit |
Total | ||||||||||
| BALANCE, JANUARY 1, 2002 | $ | 7,287 | $ | 10,295,323 | $ | (27,769,632) | $ | (17,467,022) | |||||
| Issuance of restricted stock |
|
100 | 70,205 | – | 70,305 | ||||||||
| Recission of shares in connection with |
|
|
|||||||||||
| legal settlement | (350) | (104,650) | – |
(105,000) |
|||||||||
| Accretion of redeemable preferred | – | (961,200) | – | (961,200) | |||||||||
| Net loss | – | – | (805,406) | (805,406) | |||||||||
|
BALANCE, DECEMBER 31, 2002 |
|
|
|
7,037 |
|
|
9,299,678 |
|
|
(28,575,038) |
|
|
(19,268,323) |
| Issuance of restricted stock | 75 | 49,500 | – | 49,575 | |||||||||
| Interest expense associated with notes |
|
|
|
|
|||||||||
| payable | 150 | 74,850 | – | 75,000 | |||||||||
| Accretion of redeemable preferred | – | (2,321,744) | – | (2,321,744) | |||||||||
|
Issuance of stock option to consultant |
|
|
|
– |
|
|
9,109 |
|
|
– |
|
|
9,109 |
|
Issuance of warrant to financial advisor |
|
|
|
– |
|
|
466,000 |
|
|
– |
|
|
466,000 |
|
Issuance of stock options to officers |
|
|
|
– |
|
|
535,000 |
|
|
– |
|
|
535,000 |
| Net loss | – | – | (1,558,773) | (1,558,773) | |||||||||
|
BALANCE, DECEMBER 31, 2003 |
|
|
|
7,262 |
|
|
8,112,393 |
|
|
(30,133,811) |
|
|
(22,014,156) |
| Conversion of preferred stock into |
|
|
|
|
|||||||||
| common stock (unaudited) | 2,653 | 19,722,186 | – | 19,724,839 | |||||||||
| Interest expense associated with notes |
|
|
|
|
|
||||||||
| payable (unaudited) | – | 75,000 | – | 75,000 | |||||||||
| Accretion of redeemable preferred (unaudited) | – | (2,215,625) | – | (2,215,625) | |||||||||
|
Issuance of stock options to officers |
|
|
|
– |
|
|
161,000 |
|
|
– |
|
|
161,000 |
| Net loss (unaudited) |
|
|
(1,226,275) | (1,226,275) | |||||||||
|
BALANCE, JUNE 30, 2004 (unaudited) |
|
|
$ |
9,915 |
|
$ |
25,854,954 |
|
$ |
(31,360,086) |
|
$ |
(5,495,217) |
See notes to financial statements.
F-6
SMART ONLINE, INC.
CONSOLIDATED
NOTES
TO FINANCIAL STATEMENTS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 2004 AND
2003 (Unaudited) AND THE YEARS ENDED
DECEMBER 31, 2003 AND 2002.
Smart Online, Inc. (the "Company" or "Smart Online") was incorporated in the State of Delaware in 1993. Smart Online develops and markets Internet-delivered Software-as-Service (SaS) software applications and data resources to start, run, protect and grow small businesses (one to fifty employees). Smart Online's subscribers access Smart Online's products through the portal at www.SmartOnline.com directly and through the web sites of private label syndication partners that include major companies and financial institutions.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the six-month period ending June 30, 2004, and the years ended December 31, 2003 and 2002, Smart Online incurred net losses as well as negative cash flows and, at December 31, 2003, has deficiencies in working capital and equity. These factors indicate that Smart Online may be unable to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should Smart Online be unable to continue as a going concern. Smart Online's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meets its obligations on a timely basis, to obtain additional financing as may be required and ultimately to attain profitable operations and positive cash flows. Smart Online's future plans include the development introduction and maintenance of Smart Online's next generation product, OneBiz Conductor, and the introduction of additional new products and enhancing its webnative business applications. As more fully described in Note 13, during August 2004, Smart Online raised an additional $1,100,000 through the sale of additional shares of Common Stock. Additionally, Smart Online is in discussions with several potential integration, syndications, and technology platform licensing partners that, if successful, could result in positive cash flow from operations. However, there can be no assurance that these efforts will be successful.
Smart Online continues to incur development expenses to enhance and expand its product by focusing on establishing its Internet-delivered Software-as-Services (SaS) software applications and data resources. All allocable expenses to establish the technical feasibility of the software have been recorded as research expense. The ability of Smart Online to successfully develop and market its next generation of products is dependent upon certain factors, including the success of Smart Online’s existing services and products, the timing and success of any new services and products, the progress of research and development efforts, results of operations, the status of competitive services and products, and the timing and success of potential strategic alliances or potential opportunities to acquire technologies or assets may require Smart Online to seek additional funding sooner than expected. There can be no assurance that sufficient additional capital needed to sustain operations will be obtained by Smart Online or that the Company’s operations will become profitable.
F-7
Unaudited Interim Financial Information – The accompanying unaudited interim balance sheet as of June 30, 2004, the statements of operations and cash flows for the six months ended June 30, 2004 and 2003 and the statement of stockholders’ deficit for the six months ended June 30, 2004 are unaudited. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of the Company’s management, the unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s statement of financial position, results of operations and its cash flows for the six months ended June 30, 2004 and 2003. The results for the six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.
Revenue Recognition – We recognize revenue in accordance with accounting standards for software and service companies including United States Securities Exchange Commission (“SEC”), Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB 104”), the Emerging Issues Task Force Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”) , and related interpretations including American Institute of Certified Public Accountants (“AICPA”) Technical Practice Aids. We also utilize interpretative guidance from regulatory and accounting bodies, which include, but are not limited to, the SEC, the AICPA, the Financial Accounting Standards Board (“FASB”), and various professional organizations.
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
We recognize revenues from syndication, integration and web business services each month over the estimated lives of the contracts. Typically the contract terms cover a period of one to two years and provide for early termination upon a material breach by either party that is not cured in a timely manner. Should the contract terminate earlier than its term then we recognize the remaining deferred revenue upon termination. Subscription revenue is recognized ratably over the subscription period (usually one year). Third-party premium products are shared with integration partners.
OEM revenues are recorded based on the greater of actual sales or contractual minimum guaranteed royalty payments. Smart Online records the minimum guaranteed royalties monthly and receives payment of the royalties on a quarterly basis, thirty days in arrears. To the extent actual royalties exceed the minimum guaranteed royalties, the excess is recorded in the quarter Smart Online receives notification of such additional royalties.
Consulting revenues are recognized over the term of the consulting engagement, typically one to three months. Advance payments for consulting services, if billed and paid prior to completion to the project, are recorded as deferred revenue when received.
Barter Transactions – Barter revenue relates to syndication and integration services provided by Smart Online to business customers in exchange for advertising in the customers’ trade magazines and on their Web sites. Barter expenses reflect the expense offset to barter revenue. The amount of barter revenue and expense is recorded at the estimated fair value of the services received or the services provided, whichever is more objectively determinable, in the month the services and advertising are exchanged. Smart Online applies the provisions of EITF 93-11, “Accounting for Barter Transactions Involving Barter Credits” and, accordingly, recognizes barter revenues only to the extent that Smart Online has similar cash transactions within a period not to exceed six months prior to the date of the barter transaction. Barter revenues totaled $63,333 for the six-months ended June 30, 2004. Smart Online did not have any barter transactions for the years ended December 31, 2003 and 2002.
F-8
Cash and Cash Equivalents – All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.
Software Development Costs – Smart Online has not capitalized any direct or allocated overhead associated with the development of software products prior to general release. SFAS No. 86, Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs related to software development incurred between completion of the working model and the point at which the product is ready for general release have been insignificant.
Impairment of Long Lived Assets – Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Property and Equipment –Property and equipment are stated at cost and are depreciated over their estimated useful lives, using the straight-line method as follows:
| Office equipment | 5 years |
| Furniture and fixtures | 7 years |
| Leasehold improvements | 3 to 7.5 years |
Intangible Assets – Intangible assets consists primarily of trademarks and are being amortized over their estimated useful lives.
Fair Values – The fair values of cash equivalents, accounts receivable, accounts payable, accrued liabilities, and notes payable approximate the carrying values due to the short period of time to maturity.
Accretion of Redemption Value of Redeemable Preferred Stock – The Company accretes the redemption value of redeemable preferred stock ratably over the minimum period such stock is outstanding. In addition, accrued but unpaid dividends are recorded to increase the carrying value of the redeemable preferred stock to the redemption value at maturity.
Advertising Costs – Smart Online expenses all advertising costs as they are incurred. The amount charged to expense for the six months ended June 30, 2004 and 2003 was $54,482 and $1,557, respectively. Advertising expense during 2003 and 2002 was $3,167 and $9,766, respectively. Smart Online did not have any barter transactions for the years ended December 31, 2003 and 2002. In the first six months of 2004, Smart Online recognized $41,250 of barter advertising expenses.
F-9
Net Loss per Share — Basic loss per share is computed using the weighted-average number of common shares outstanding during the periods. Diluted loss per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of redeemable preferred stock, stock options and warrants that are computed using the treasury stock method. The Company excluded shares issueable upon the exercise of redeemable preferred stock, stock options and warrants from the calculation of common equivalent shares as the impact was anti-dilutive.
Stock-Based Compensation – Smart Online accounts for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Stock Options are generally granted at prices equal to the fair value of Smart Online’s common stock on the grant dates (see Note 8). Accordingly, Smart Online did not record any compensation expense in the accompanying financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” Smart Online’s net loss attributed to common stockholders and net loss attributed to common stockholders per share for the six-months ended June 30, 2004 and 2003 and the years ended December 31, 2003 and 2002 would have been changed to the pro forma amounts indicated below:
|
Six-months
ended June 30, 2004 |
Six-months
ended June 30, 2003 |
Year ended
December 31, 2003 |
Year ended
December 31, 2002 |
||||||||||
|
|
|
|
|
|
|
|
|||||||
| Net net loss attributed to |
|
||||||||||||
| common stockholders: |
|
||||||||||||
| As reported |
$ |
(3,441,900) | $ | (589,538) | $ | (3,880,577) | $ | (1,766,606) | |||||
| Add: Compensation cost |
|
||||||||||||
| recorded at intrinsic | |||||||||||||
| value |
|
161,000 |
|
— |
|
535,000 |
|
— | |||||
| Less: Compensation cost using |
|
||||||||||||
| the fair value method | |||||||||||||
| the fair value method |
|
(416,534) |
|
(90,117) |
|
(961,234) |
|
(2,142) | |||||
| Pro forma |
$ |
(3,697,434) | $ | (679,655) | $ | (4,306,751) | $ | (1,764,464) | |||||
|
Six-months
ended June 30, 2004 |
Six-months
ended June 30, 2003 |
Year ended
December 31, 2003 |
Year ended
December 31, 2002 |
||||||||||
|
|
|
|
|
|
|
|
|||||||
| Reported net loss attributed to |
|
||||||||||||
| common stockholders: |
|
||||||||||||
| Basic and diluted |
$ |
(0.40) | $ | (0.08) | $ | (0.53) | $ | (0.25) | |||||
| Add: Compensation cost |
|
||||||||||||
| recorded at intrinsic | |||||||||||||
| value |
|
0.02 |
|
— |
|
0.07 |
|
— | |||||
| Less: Compensation cost |
|
||||||||||||
| using the fair value | |||||||||||||
| method | (0.05) | (0.01) | (0.13) | — | |||||||||
|
|
|||||||||||||
| Pro forma net loss per share: |
|
||||||||||||
| Basic and diluted | $ | (0.43) | $ | (0.09) | $ | (0.59) | $ | (0.25) | |||||
The fair value of option grants under Smart Online’s plan and other stock option issuance during the six-months ended June 30, 2004 and 2003, and the years ended December 31, 2003 and 2002 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions were used:
F-10
Management Estimates – The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expense for the period then ended. Certain estimates made by Smart Online pertain to allowance for doubtful accounts, returns, and litigation reserves. Actual results could differ from those estimates.
As noted above we recognize revenues from syndication, integration and web business services each month over the estimated lives of the contracts, typically the contract term. Should the contract terminate earlier than estimated, then we recognize the remaining deferred revenue upon termination. During 2002, 2003 and the first six months of 2004, Smart Online recognized revenues from early termination of contracts in the amount of $133,979, $76,389 and $0, respectively.
New Accounting Standards — In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”. This interpretation establishes new guidelines for consolidating entities in which a parent company may not have majority voting control, but bears residual economic risks or is entitled to receive a majority of the entity’s residual returns, or both. As a result, certain subsidiaries that were previously not consolidated under the provisions of Accounting Research Bulletin No. 51 may now require consolidation with the parent company. This interpretation applies in the first year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management reviewed this interpretation and determined that it did not have any variable interest entities.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In accordance with the provisions of this statement, the Company recorded a current liability, as of June 30, 2004, for the shares subject to the rescission offer (see note 13).
3. RECEIVABLES
Smart Online evaluates the need an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. Management also records an additional allowance based on certain percentages of its receivables over 90 days old, which are determined based on historical experience and management’s assessment of the general financial conditions affecting its customer base. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, management has determined that no provision for uncollectible accounts is required as of June 30, 2004 and December 31, 2003 or 2002.
F-11
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
|
June 30,
2004 (unaudited) |
December 31,
2003 |
December 31,
2002 |
|||||||||
|
Office equipment |
|
|
$ |
14,687 |
|
$ |
10,026 |
|
$ |
25,240 |
|
| Furniture and fixtures | 7,125 | 7,125 | 57,268 | ||||||||
| Computer software | 391,063 | 391,063 | 471,151 | ||||||||
| Computer equipment | 703,246 | 682,999 | 875,327 | ||||||||
| 1,116,121 | 1,091,213 | 1,428,986 | |||||||||
| Less accumulated depreciation | (1,062,281) | (1,042,266) | (1,321,775) | ||||||||
| Property and equipment, net | $ | 53,840 | $ | 48,947 | $ | 107,211 |
Depreciation expense for the periods ended June 30, 2004 and 2003 was $20,015 and $29,927 (unaudited), respectively, and $59,852 and $242,877 for the years ended December 31, 2003 and 2002 , respectively.
5. DEFERRED COMPENSATION
Certain officers of Smart Online deferred a portion of their compensation, including commissions and interest charges on previously earned but unpaid compensation, from the second quarter of 2001 until May, 2004. In October 2003, these salary deferrals were converted to promissory notes (the “2003 Notes”) payable. On or before May 31, 2004 that bore interest at a rate of 15% per annum. In April 2004, the holders of the 2003 Notes agreed to exchange the existing notes for new promissory notes payable on or before December 31, 2005. The new notes bore interest at a rate of 15% per annum through June 1, 2004 at which time the holders voluntarily reduced the rate to 8% per annum. Deferred compensation totaling $171,117 (unaudited) and $154,581 (unaudited) is included in salaries and wages expense for the six-months ended June 30, 2004 and 2003, respectively, and $353,816, and $368,792 for the years ended December 31, 2003 and 2002, respectively. The following is a summary of deferred compensation and accrued interest payable on the deferred compensation as of:
F-12
|
June 30,
2004 (unaudited) |
December 31,
2003 |
December 31,
2002 |
|||||||||
| Deferred compensation | $ | 984,325 | $ | 979,813 | $ | 676,425 | |||||
| Accrued interest payable on deferred compensation | 103,666 | 31,835 | 0 | ||||||||
|
Total deferred compensation payable |
|
|
$ |
1,087,991 |
|
$ |
1,011,648 |
|
$ |
676,425 |
|
6. LOANS
During 2000 Smart Online borrowed $125,000 from a shareholder, David Williams,. The loan accrued interest at a rate of 8.0% per annum and was repaid in March 2004 including accrued interest of $33,534.
During 2002, William Furr, a relative of one of Smart Online's officers, lent Smart Online $270,000. In consideration for this loan, Smart Online issued 20,000 shares of restricted stock to this individual without additional consideration by Mr. Furr. Subsequently during 2002, Smart Online repaid $225,000 of this indebtedness. In 2003, Smart Online borrowed an additional $190,000 from this individual and repaid $10,000. In consideration for extending the term of the 2002 borrowings and for loaning the additional $190,000, Smart Online issued this individual an additional 150,000 shares of Common Stock. Smart Online recorded interest expense of $75,000 in 2003 and 2004 related to this issuance. In additional, this note accrued interest at a rate of 15% per annum. In March 2004, Smart Online repaid this indebtedness in full plus accrued interest of $10,264.
See Note 11 - Related Party Transaction for additional loans from related parties.
7. LEASES
Operating Leases - Smart Online leases its facility under a renewable, operating lease agreement which current term expires in October 2004. Future annual minimum operating lease payments for the period July through October 2004 are $43,920.
Rent expense for the periods ended June 30, 2004 and 2003 was $45,618 and $43,920 (unaudited), respectively, and $87,146 and $87,900 at December 31, 2003 and 2002, respectively.
F-13
8. STOCKHOLDERS' DEFICIT
Corporate Reorganization
During the first quarter of 2004, Smart Online completed a corporate reorganization of its capital stock, which eliminated the Series A Preferred Stock of Smart Online. All holders of Series A Preferred Stock who participated in the reorganization by signing Reorganization, Lock-up Proxy and Release agreements dated January 1, 2004 (the "Reorganization Agreements") received two shares of common stock of Smart Online for each share of Series A Preferred Stock they held prior to the reorganization and also received the right to receive cash payments from Smart Online equal to a percentage of the net proceeds Smart Online raises during calendar year 2004 from sales of equity securities and convertible debt securities in excess of $5 million of net proceeds. The percentage payable to participating holders of Series A Preferred Stock is as follows: (i) 20% of net proceeds between $5 million and $10 million of net proceeds, (ii) 30% of net proceeds between $10 million and $15 million of net proceeds, and (iii) 40% of net proceeds between $15 million and $20 million of net proceeds. As of June 30, 2004, Smart Online had raised a total of $3,333,643 of net proceeds and no amounts were paid or owed to participating holders of Series A Preferred Stock.
Participating holders of Series A Preferred Stock who signed the Reorganization Agreements also agreed a portion of the common shares they received in the reorganization to transfer restrictions that include, among other restrictions, a "lock-up" agreement preventing the sale or transfer of the shares (other than transfers to certain related parties). Pursuant to the lock-up agreement commencing October 1, 2005 through September 30, 2006 each holder may transfer up to 8.5% of such holder's shares that are subject to the restrictions during each calendar month. The Reorganization Agreements also contained mutual releases by Smart Online and participating holders of Series A Preferred Stock.
Common Stock
Smart Online is authorized to issue 45,000,000 shares of common stock, $0.001 par value per share (the "Common Stock"). As of June 30, 2004, Smart Online has 10,912,883.77 shares of Common Stock outstanding. Holders of Common Stock are entitled to one vote for each share of Common Stock held by them.
During 2002, as partial settlement of a lawsuit, Smart Online received back 350,000 shares of its Common Stock that were previously issued during 1998 in consideration for the purchase of a French company. The fair value of the returned common stock was determined to be approximately $105,000, which was recorded as a reduction in stockholders' deficit and as income in the year ended December 31, 2002.
During the first half of 2004, following the conversion of its Preferred Stock to Common Stock as described above, Smart Online sold 999,141 shares of Common Stock to new and existing shareholders at a purchase price of $3.50 per share resulting in gross proceeds of $3,498,783. Smart Online incurred issuance costs of $164,640 related to these sales, including $31,000 paid to an officer of Smart Online. As an inducement to one of the investors that participated in this round of financing, an officer of Smart Online and a shareholder entered into a Put Agreement dated March 10, 2004 with the investor. Smart Online is not a party to this agreement, but this agreement was entered into at the time of the investment into Smart Online to provide comfort to the investor that Smart Online would fulfill its obligation to cause its Common Stock to be publicly traded. The Put Agreement gives the investor the right to require the grantors to purchase for $2.2 million the 628,571 shares of Common Stock and warrants to purchase 188,571 shares of Commons Stock held by the investor. The Put Agreement can be exercised at the sole discretion of the investor during the month of March 2005 or during the month of March 2006. The Put Agreement terminates and the put option cannot be exercised after (i) the Common Stock of Smart Online is listed or quoted for public trading, or (ii) the stockholders of Smart Online vote to approve any action reasonably necessary to cause Smart Online's stock to be publicly traded, but the aforementioned investor votes against the action, or (iii) the aforementioned investor transfers any of its Common Stock or warrants to a third party. The Put Agreement cannot be assigned and terminates if the investor transfers the securities covered by the Put Agreement.
F-14
Preferred Stock
Our Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of $0.001 par value preferred stock (the "Preferred Stock") in one or more series and to fix the rights, preferences, privileges and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series.
In November 2003, Smart Online sold 495,320 shares of Series A Redeemable Preferred Stock to an existing holder of Smart Online's common stock for a purchase price of $1.00 per share. An officer of Smart Online is a minority shareholder in the entity that purchased these shares. Since the Series A Redeemable Preferred Stock is redeemable at the discretion of the holder, the preferred stock is characterized as mezzanine capital and the accretive value and accrued dividends are amortized through the date of redemption noted below.
As described above, in March 2004, the outstanding shares of Smart Online's Series A Redeemable Preferred Stock were converted to Common Stock pursuant to a plan of reorganization approved by Smart Online's Board of Directors and shareholders. The carrying value of $19,722,186 for redeemable preferred stock at date of conversion was reclassed to common stock and additional paid-in capital. The Series A Redeemable Preferred Stock had a noncumulative dividend rate of $0.35 per quarter, a liquidation preference of $15.12 per share, plus declared unpaid dividends, was convertible into Common Stock at an initial rate of one share of Common Stock for each share of Series A Redeemable Preferred Stock (but the conversion rate increased to approximately 1.22 shares of Common Stock for each share of Series A Redeemable Preferred Stock at the time of conversion pursuant to weighted average antidilution provisions), was entitled to cast one vote for each share of Common Stock into which it was convertible voting as a single class with the Common Stock, had class voting rights with respect to certain major corporate events and was redeemable at the option of its holders after August 31, 2004 for a price equal to $14 per share, plus 7% compounded annually. There were no shares of Preferred Stock outstanding at June 30, 2004.
Restricted Stock
During 2001 Smart Online issued 1,498,500 shares of restricted stock to employees of Smart Online for no cash consideration, pursuant to agreements which provided for the cancellation of these shares if certain liquidity events did not occur by certain dates. In April 2002 Smart Online agreed to release the restriction on the stock for consideration of $0.02 per share, or a total of $20,396. Smart Online recorded salary expense of $50,158 in 2002 related to the 2001 issuance and the 2002 release of the restrictions.
In April 2002 Smart Online issued 60,000 shares of restricted stock to an officer of Smart Online at a purchase price of $0.02 per share.
In January 2003, Smart Online issued 15,000 shares of restricted stock to an individual who later became an officer of Smart Online for no cash consideration. Smart Online recorded $7,500 of consulting expense in 2003 related to this grant of restricted stock. Subsequently, in May 2003, Smart Online issued an additional 60,000 shares of restricted stock to a consulting firm owned by this same individual for no cash consideration. Smart Online recorded $42,000 of consulting expense in 2003 related to this grant of restricted stock.
F-15
Warrants
During 2001, Smart Online issued a warrant to purchase 619,309 shares of Common Stock at a price of $18.00 per share. Pursuant to the terms of this warrant, subsequent issuances of securities by Smart Online caused adjustments to the number of shares issuable and to the exercise price of this warrant. At June 30, 2004, up to approximately 925,789 shares were issuable upon exercise of the warrant at an exercise price of approximately $12.04 per share. During September 2004, as more fully described in Note 13, this warrant was exchanged for 100,000 shares of Common Stock for no additional consideration.
In November 2003, Smart Online granted a warrant to purchase 350,000 shares of Common Stock to a financial consulting firm as partial consideration for consulting services. This warrant has an exercise price of $1.30 per share, is subject to anti-dilution adjustment, and expires in 2006. Smart Online recorded $466,000 of consulting expense during 2003 related to the issuance of the warrants. During the first half of 2004, Smart Online issued warrants to purchase an aggregate of 288,638 shares of Common Stock to shareholders in connection with the 2004 Common Stock issuance described above. These warrants have an exercise price of $3.50 per share and expire in 2014.
All the foregoing warrants contain cashless exercise provisions.
Stock Option Plans
2004 Equity Compensation Plan
Smart Online adopted the 2004 Equity Compensation Plan (the "2004 Plan") as of March 31, 2004. The 2004 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of Smart Online as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2004 plan is 5,000,000 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar capital change. During the second quarter of 2004, Smart Online granted options to purchase 394,000 shares of Common Stock to employees and officers of Smart Online at an exercise price of $3.50 per share. Additionally, during May 2004 Smart Online issued options to purchase 50,000 shares of Common Stock of Smart Online to a consultant at an exercise price of $3.50 per share. The fair value of the options, issued to the consultant, at the grant date was not significant. At June 30, 2004, options to purchase 444,000 shares of common stock were outstanding under the 2004 Plan with an exercise price of $3.50 per share.
2001 Equity Compensation Plan
Smart Online adopted the 2001 Equity Compensation Plan (the "2001 Plan") as of May 31, 2001. The 2001 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of Smart Online as well as to certain consultants and advisors. The total number of shares of our common stock reserved for issuance under the 2001 plan is 2,263,500 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change.
During 2003 Smart Online granted options to purchase 700,000 shares of Common Stock to employees and officers of Smart Online at exercise prices ranging from $1.30 to $1.43 per share. Smart Online recorded compensation expense of $535,000 in 2003 related to this issuance. Additionally, during 2003 Smart Online issued options to purchase 20,000 shares of Common Stock of Smart Online to a consultant at an exercise price of $1.30 per share. Smart Online recorded consulting expense of $8,960 in 2003 related to this issuance.
F-16
During February 2004 Smart Online granted options to purchase 150,000 shares of Common Stock to two officers of Smart Online at an exercise price of $1.30 per share. Smart Online recorded $161,000 of compensation expense during 2004 related to the grant of these options.
At June 30, 2004, options to purchase 870,000 shares of common stock were outstanding under the 2001 Plan. Smart Online cannot make any further grants under the 2001 plan.
1998 Stock Option Plan
Smart Online adopted the 1998 Equity Compensation Plan (the "1998 Plan") as of November 12, 1998. The 1998 plan provides for the grant of options intended to qualify as "incentive stock options," and options that are not intended to so qualify or "nonstatutory stock options." As of June 30, 2004, the total number of shares of our common stock reserved for issuance under the 1998 plan is 488,900 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change. Options to purchase 488,900 shares were outstanding under the 1998 plan at June 30, 2004. Smart Online may not make any further grants under the 1998 plan.
Additional Options Granted
Additionally, at June 30, 2004 options to purchase 150,000 shares of Common Stock originally issued in 2000 were outstanding outside any of the aforementioned stock option plans.
The exercise price for incentive stock options granted under the above plans is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of 5 years. Nonstatutory stock options have a term determined by the Board of Directors. Options granted under the plans are not transferable, except by will and the laws of descent and distribution.
A summary of the status of the plan and other stock option issuances as of December 31, 2002, 2003 and June 30, 2004 and changes during the periods ended on these dates is as follows:
F-17
The following table summarizes information about stock options outstanding at June 30, 2004:
| Currently Exercisable | |||||
|
Exercise
Price |
Number of
Shares Outstanding |
Average
Remaining Contractual Life (Years) |
Weighted
Average Exercise Price |
Number of
Shares |
Weighted
Average Exercise Price |
|
$ 1.30 - $ 1.43 |
870,000 |
4.5 |
$ 1.37 |
720,000 |
$ 1.37 |
|
$ 3.50 |
444,000 | 9.8 |
$ 3.50 |
0 |
$ 3.50 |
| $ 5.00 - $ 5.50 | 638,900 | .8 |
$ 5.16 |
638,900 |
$ 5.16 |
| $ 1.30 - $ 5.50 | 1,952,900 | 4.5 |
$ 3.10 |
1,575,400 |
$ 3.00 |
Dividends – Smart Online has not paid any cash dividends through June 30, 2004.
9. INCOME TAXES
Smart Online accounts for income taxes under the asset and liability method in accordance with the requirements of Statement of Financial Accounting Standard No. 109 (““FAS 109"". Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
The balances of deferred tax assets and liabilities are as follows:
|
June 30,
2004 (Unaudited) |
December 31,
2003 |
December 31, 2002 | |||||||||
|
Net current deferred income tax
assets relate to: |
|||||||||||
| Depreciation |
$ |
13,000 |
$ |
18,000 |
$ |
41,000 | |||||
| Accrued liabilities | 419,000 | 390,000 | 261,000 | ||||||||
| Net operating loss carryforwards | 10,279,000 | 9,909,000 | 9,844,000 | ||||||||
| Total | 10,711,000 | 10,317,000 | 10,146,000 | ||||||||
| Less valuation allowance | 10,711,000 | 10,317,000 | 10,146,000 | ||||||||
| Net current deferred income tax |
$ |
0 |
$ |
0 |
$ |
0 | |||||
Under SFAS 109, a valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.
Total income tax expense differs from expected income tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to profit (loss) before taxes for the six months ended June 30, 2004 and 2003 and for the years ended December 31, 2003 and 2002) as follows:
As of, December 31, 2003 Smart Online had US federal net operating loss (“NOL”) carryforward of approximately , $25,701,000 , respectively, which expire between 2009 and 2023. For state tax purposes, the NOL’s expire between 2009 and 2019. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of Smart Online within a three-year period can result in an annual limitation on Smart Online’s liability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership.
F-18
10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Smart Online to credit risk consist principally of trade receivables. Smart Online believes the concentration of credit risk in its trade receivables is substantially mitigated by Smart Online’s ongoing credit evaluation process, relatively short collection terms and the nature of Smart Online’s syndication partner client base, primarily mid and large size public corporations with significant financial histories. Smart Online does not generally require collateral from customers. Smart Online evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
A customer that is owned by a shareholder of Smart Online accounted for approximately 27.2% and 31.3% of total revenues for the year ended December 31, 2003 and the six-months ended June 30, 2004. A second customer that is 50% owned by an officer of Smart Online accounted for 11.9% of 2003 revenues. A third customer that is owned in part by a shareholder and officer of Smart Online accounted for approximately 1.6% of 2003 revenues.
Smart Online had three customers that represented 59.1%, 23.9% and 14.3% of total receivables at December 31, 2003 and two customers that represented 19.8% and 12.0% of total receivables at December 31, 2002.
11. RELATED PARTY TRANSACTIONS
American Investment Holding Group, Inc., which is wholly-owned by two officers of Smart Online, owns approximately 26% of the outstanding Common Stock of Smart Online as of June 30, 2004. The same officers also own a controlling interest in other companies.
An officer of Smart Online and a trust established by this officer for the benefit of his children, have from time to time provided loans to Smart Online. As of January 1, 2002, Smart Online owed these parties $40,731 related to outstanding loans. During 2002, the Company borrowed an additional $77,980 from and repaid $108,316 to these same parties leaving an outstanding liability to the officer and the trust of $10,395 at December 31, 2002. During 2003, the Company borrowed an additional $796,568 and repaid $759,165 to these same parties leaving an outstanding liability to the officer and the trust of $47,798 at December 31, 2003. During the first six months of 2004, the Company borrowed an additional $186,335 and repaid the entire remaining outstanding balance of $186,335. As of June 30, 2004 all borrowings from and loans to the officer and the trust were repaid in full. Until October 2003, the Company did not pay any interest on these loans, thereafter the loans accrued interest at a rate of 15.0%.
During 2003 and 2004, Smart Online has contracted with a consulting firm owned by one of its officers to provide strategic international sales and marketing services. Smart Online paid consulting fees of $35,000 and $27,083 in 2004 and 2003, respectively, related to these services. Additionally, as discussed in Note 8, Smart Online paid the consulting firm owned by one of its officers $31,000 related to the sale of certain shares of Common Stock during the first half of 2004.
During 2001 Smart Online utilized the services of an entity owned 50% by an officer of Smart Online and 50% by the officer’s brother, who is also an employee of Smart Online, to provide marketing services for a fee of $11,578. This fee was included in accounts receivable at December 31, 2001 and was paid during 2002. During 2003 Smart Online provided consulting services totaling $150,000 to this same related party. The consulting income is included in the Statement of Operations under “Other Revenues”.
F-19
On August 13, 2002, Smart Online entered into an integration agreement with a company owned by a shareholder of Smart Online to incorporate its products into Smart Online’s platform. As part of this agreement, the related company paid Smart Online $300,000 for such integration, and the parties agreed to share future revenues generated from the sales of the products. On August 30, 2002, the parties signed an amendment to the original agreement, in order for Smart Online to provide the related company certain co-development services, which includes instant messenger and video conferencing. In exchange, the related company paid Smart Online additional sum of $300,000. The parties further agreed that the products developed as a result of both companies’ efforts will be owned by both parties. On April 30, 2003, Smart Online and the related company signed a new amendment and restated the integration program agreement. According to this new amendment and restated agreement, Smart Online agreed to fund the future development of the products. In exchange, the related company agreed to limit future amounts payable by Smart Online under the original shared revenue agreement to $1.7 million.
In addition to above agreements, on August 30, 2002, Smart Online and the same related company also entered into a reseller agreement whereby the related company paid the sum of $200,000 for the right to distribute Smart Online’s products in the territories of Israel, United Kingdom, France, Italy, Netherlands, and Spain, in exchange for Smart Online’s marketing support and a twenty percent commission from the gross sales generated by the related company. On March 17 and 27, 2003, the parties subsequently modified the original re-seller agreement to restrict the territory to only Israel and Netherlands. Additionally, on December 22, 2003, Smart Online signed a private label syndication agreement with the same related company to provide website development for the related company’s website.
Smart Online paid the same related company $3,300 for moving expenses with regard to the related company’s development team visiting Smart Online from Israel in January of 2003. Smart Online also paid the same related company $25,000 as a reseller payment for the Moneris Integration contract they secured pursuant to their re-seller agreement in May of 2003. Smart Online also paid the same related company $90,000 pursuant to their contract dated December 20, 2003 for technical co-development work on a monthly payment of $15,000 starting in December of 2003 and ending in May of 2004.
In March 2004, the above mentioned related party ceased operations. The Company continues to support this technology on behalf of the dormant company with the current integration agreement running through the end of 2004. The revenues derived from this agreement with the related party are being recognized as income on a straight line basis over the life of the agreement and at June 30, 2004, the Company had approximately $157,000 of deferred revenue associated with this integration agreement.
Additionally, during 2003 Smart Online provided $20,200 of consulting services to an entity of which an officer of Smart Online is also an officer and in which another officer of Smart Online is a minority shareholder. At December 31, 2003, $20,200 was included in accounts receivable and subsequently collected in 2004. Smart Online paid $63,133 in 2003 and $158,384 in 2004 to the same company, because that company paid Smart Online’s employees during the first quarter of 2004 while Smart Online was dealing with a tax matter with the Internal Revenue Service.
As of December 31, 2001, Smart Online owed an officer of Smart Online $40,731 related to loans he had made to Smart Online. During 2002, Smart Online borrowed an additional $77,980 from and repaid $108,316 to this same officer. During 2003, Smart Online borrowed an additional $340,776 from and repaid $264,692 to this officer. During the first six months of 2004, Smart Online borrowed an additional $4,793 from and repaid the entire remaining outstanding balance of $91,273 to this officer. At December 31, 2003 and 2002 Smart Online owed $86,480 and $10,395, respectively, to this officer. Until October 2003, Smart Online did not pay any interest on these loans, thereafter the loans accrued interest at a rate of 15.0%. Additionally, during 2003 Smart Online lent a trust established by this officer $494,473 of which $455,792 was repaid in the same year. During the first six months of 2004, Smart Online lent the trust an additional $142,860 and the trust repaid the entire balance owed to Smart Online totaling $181,542. As of June 30, 2004 all borrowings from and loans to the officer and the trust were repaid in full.
F-20
12. CONTINGENCIES
In March 2004, Smart Online paid the outstanding balance if its payroll taxes in the amount of $1,003,830 plus accrued interest of $122,655, for the period of fourth quarter 2000 through the fourth quarter of 2003, to the Internal Revenue Service. The Internal Revenue Service has notified Smart Online that it owes an additional $512,602 of penalties plus accrued interest of $49,746 related to the above matter and that additional penalties and interest will continue to accrue until the obligation is fully paid or a settlement is reached. Smart Online has retained counsel to contest the imposition of penalties through the appeals process and, if such appeals are denied, to pursue a settlement with the Internal Revenue Service. As of June 30, 2004, Smart Online has accrued the full amount of this proposed assessment in the periods to which the penalties relate.
Smart Online is subject to other claims and suits that arise from time to time in the ordinary course of business including claims asserted by two former commercial business partners. The first claim asserts that Smart Online owes $92,204 for advertising which Smart Online asserts was faulty. Smart Online has asserted counterclaims for breach of contract. Neither party has yet served discovery and no trial date has been set. In the second claim, Smart Online is being sued for breach of contract, unfair and deceptive trade practices, and punitive damages, alleging that Smart Online improperly refused to refund a $32,500 integration fee. Smart Online filed a counterclaim for breach of contract for failure to pay Smart Online certain sums it was due under the revenue sharing plan set forth in the contract between the parties. Smart Online believes plaintiff’s claims for unfair and deceptive trade practice and punitive damages are without merit. The case is currently in the fact discovery phase. No trial date has been set. While management currently believes that resolving these matters, individually or in aggregate, will not have a material adverse impact on Smart Online’s financial position or results of operations, the litigation and other claims noted above are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on Smart Online’s financial position and the results of operations for the period in which the effect becomes reasonably estimable.
13. SUBSEQUENT EVENTS
Stock Option Activity
On July 1, 2004, Smart Online granted options to purchase 60,000 shares of Common Stock under the 2004 Equity Compensation Plan to members of Smart Online’s advisory committee. These options had an exercise price of $3.50 per share and a term of ten years.
On July 1, 2004, Smart Online granted options to purchase 75,000 shares of Common Stock, including 75,000 options to officers of Smart Online, under the 2004 Equity Compensation Plan to an officer of Smart Online. These options had an exercise price of $3.50 per share and a term of ten years.
F-21
On July 13, 2004, options to purchase an aggregate of 200,000 shares of Common Stock granted to two officers of Smart Online expired without being exercised. These options were originally granted in 1999 and had an exercise price of $5.00 per share.
Rescission Offer
On August 6, 2004, Smart Online made a rescission offer to shareholders who purchased 999,141 shares of common stock of Smart Online and warrants to acquire an additional 288,638 shares of common stock for $3.50 per share in a private placement conducted during March through June of 2004 as described in Note 8, in which Smart Online raised a total of $3,496,994. The rescission offer was made because in connection with the audit of its financial statements and due diligence review of information in connection with the registration statement of which this Prospectus is a part, Smart Online identified certain inaccuracies and omissions in the information it provided to investors in the private placement. Upon identifying such inaccuracies and omissions, Smart Online made the rescission offer and disclosed the inaccuracies and omissions to all investors who purchased shares in the private placement. In the rescission offer, Smart Online offered to repurchase all the shares and warrants sold in the private placement for the original purchase price, plus interest, and afforded shareholders a thirty-day period in which to accept the rescission offer. One shareholder accepted the rescission offer and Smart Online paid that shareholder $102,610 as payment in full of the purchase price, including interest thereon of $2,608 in exchange for 28,572 shares of common stock and warrants to purchase 7,500 shares of common stock. No other shareholders accepted the rescission offer and all shareholders to whom the offer was made executed and delivered releases for any potential liabilities arising out of disclosures made by Smart Online in the private placement. Since the Company made the decision to have a rescission offer, a current liability was reflected in the balance sheet as of June 30, 2004 for the net proceeds of the offering.
The unaudited affects of the rescission offer on a pro forma basis as though Smart Online had completed the rescission offer as of June 30, 2004 would be to decrease current liabilities by $3,394,384 and to decrease stockholders' deficit by $3,394,384. The earnings per share at June 30, 2004 would have decreased by .01.
Shares Issued in Pursuant to Registration Rights Agreement
In connection with the private placement conducted during March through June of 2004, Smart Online and the investors executed registration rights agreements as more fully described in Note 8. This registration rights agreement required Smart Online to pay investors 2% of their investment for each thirty-day period after July 1, 2004 in which Smart Online failed to file a registration statement registering shares sold in the private placement, which amount is prorated for partial 30-day periods. The registration rights agreements provided that Smart Online could choose to pay this by issuing shares of its common stock in lieu of cash, which Smart Online chose to do. On September 29, 2004, Smart Online issued 58,226 shares of its common stock to satisfy amounts that accrued through September 29, 2004 at the rate of one share for each $3.50 of accrued liability.
Exchange of Bank One Warrant
In 2001, Smart Online issued to Bank One, a warrant to purchase 619,309 shares of the common stock of Smart Online for an exercise price of $18.00 per share in connection with Smart Online and Bank One entering into a syndication partnering agreement. The warrant contained a weighted average anti-dilution provision, which caused the exercise price of the warrant at August 1, 2004 to decrease to approximately $12.04 per share and the number of shares issuable upon exercise of the warrant to increase to approximately 925,789 shares of common stock. To simplify its capital structure, Smart Online offered to issue shares of its common stock to Bank One in exchange for cancellation of the warrant. On September 3, 2004, Bank One exchanged the warrant for 100,000 shares of common stock of Smart Online, which were issued to J P Morgan Chase & Co., an affiliate of Bank One.
F-22
Private Placement
During August through September 27, 2004, Smart Online sold 290,000 shares of its common stock to investors in a private placement for a price of $5.00 per share, for an aggregate of $1,450,000. As an inducement to one of the investors that participated in this round of financing, an officer of Smart Online and a shareholder entered into a Put Agreement dated August 13, 2004 with the investor. Smart Online is not a party to this agreement, but this agreement was entered into at the time of the investment into Smart Online to provide comfort to the investor that Smart Online would fulfill its obligation to cause its Common Stock to be publicly traded. The Put Agreement gives the investor the right to require the grantors to purchase for $500,000 the 100,000 shares of Common Stock held by the investor. The Put Agreement can be exercised at the sole discretion of the investor during the month of March 2005 or during the month of March 2006. The Put Agreement terminates and the put option cannot be exercised after (i) the Common Stock of Smart Online is listed or quoted for public trading, or (ii) the stockholders of Smart Online vote to approve any action reasonably necessary to cause Smart Online’s stock to be publicly traded, but the aforementioned investor votes against the action, or (iii) the aforementioned investor transfers any of its Common Stock or warrants to a third party. The Put Agreement cannot be assigned and terminates if the investor transfers the securities covered by the Put Agreement.
F-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Amended and Restated Certificate of Incorporation eliminates the personal liability of directors to us and our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Section 102 of the Delaware General Corporation Law, provided that this provision shall not eliminate or limit the liability of a director for: (i) any breach of the director’s duty of loyalty to us or our stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) arising under Section 174 of the Delaware General Corporation Law (with respect to unlawful dividend payments and unlawful stock purchases or redemptions); or (iv) for any transaction from which the director derived an improper personal benefit.
Additionally, we have included in our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provisions to indemnify our directors, officers, employees and agents and to purchase insurance with respect to liability arising out of their performance of their duties as directors, officers, employees and agents as permitted by Section 145 of the Delaware General Corporation Law. The Delaware General Corporation Law provides further that indemnification shall not be deemed exclusive of any other rights to which the directors, officers, employees and agents may be entitled under any agreement, vote of stockholders or otherwise.
The effect of the foregoing is to require us, to the extent permitted by law, to indemnify our officers, directors, employees and agents for any claims arising against such person in their official capacities, if such person acted in good faith and in a manner that he reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Smart Online pursuant to the foregoing, or otherwise, Smart Online has been advised that the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
ITEM 25. EXPENSES OF ISSUANCE AND DISTRIBUTION.
The other expenses payable by the registrant in connection with the issuance and distribution of the securities being registered are estimated as follows:
| Securities and Exchange Commission Registration Fee | $ | 1,077 |
| Legal Fees | $ | 150,000 |
| Accounting Fees | $ | 100,000 |
| Printing and Engraving | $ | 20,000 |
| Miscellaneous | $ | 10,000 |
|
TOTAL |
$ |
281,077 |
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 2001, Smart Online has sold the following securities without registration as follows:
(1) Effective November 17, 2003, Greenleaf Venture, Ltd. purchased 495,319 shares of our Series A Convertible Preferred Stock for an aggregate purchase price of $495,319.
These securities were sold under the exemption from registration provided by Section 4(2) of the Securities Act and the rules adopted thereunder. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
(2) During the first quarter of 2004, Smart Online completed a corporate reorganization of its capital stock, which eliminated the Series A Preferred Stock of Smart Online. All holders of Series A Preferred Stock who participated in the reorganization by signing Reorganization, Lock-up Proxy and Release agreements dated January 1, 2004 (the “Reorganization Agreements”), received approximately 2.2 shares of common stock of Smart Online for each share of Series A Preferred Stock they held prior to the reorganization and also received the right to receive cash payments from Smart Online equal to a percentage of the net proceeds Smart Online raises during calendar year 2004 from sales of equity securities and convertible debt securities in excess of $5 million of net proceeds. The percentage payable to participating holders of Series A Preferred Stock is as follows: (i) 20% of net proceeds between $5 million and $10 million of net proceeds, (ii) 30% of net proceeds between $10 million and $15 million of net proceeds, and (iii) 40% of net proceeds between $15 million and $20 million of net proceeds. Smart Online received no cash in this transaction. This reorganization was ratified by stockholders in August 2004.
These securities were sold under the exemption from registration provided by Section 4(2) of the Securities Act and the rules adopted thereunder. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
(3) From March through June 2004, Smart Online sold 999,141 shares of its common stock and warrants to purchase 288,638 shares of its common stock for an aggregate gross purchase price of $3,496,994 to 19 investors pursuant to a private offering. Different investors received different amounts of warrants depending on the amount invested. On average, investors received a warrant to purchase approximately three-tenths of a share of Common Stock for each share they purchased. The warrants have an exercise price of $3.50 per share.
This offering was conducted pursuant to Rule 506 under Regulation D. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
II-2
(4) On August 6, 2004, Smart Online made a rescission offer to shareholders who purchased shares of common stock of Smart Online and warrants to acquire an additional 999,141 shares of common stock for $3.50 per share in a private placement conducted during March through June of 2004, in which Smart Online raised a total of $3,496,994. The rescission offer was made because in connection with the audit of its financial statements and due diligence review of information in connection with the registration statement of which this Prospectus is a part, Smart Online identified certain inaccuracies and omissions in the information it provided to investors in the private placement. Upon identifying such inaccuracies and omissions, Smart Online made the rescission offer and disclosed the inaccuracies and omissions to all investors who purchased shares in the private placement. In the rescission offer, Smart Online offered to repurchase all the shares and warrants sold in the private placement for the original purchase price, plus interest, and afforded shareholders a thirty-day period in which to accept the rescission offer. One shareholder accepted the rescission offer and Smart Online paid that shareholder $102,610.27 as payment in full of the purchase price and interest. No other shareholders accepted the rescission offer and all shareholders to whom the offer was made executed and delivered releases for any potential liabilities arising out of disclosures made by Smart Online in the private placement.
This rescission offer was conducted under the exemption from registration provided by Section 4(2) of the Securities Act and the rules adopted thereunder. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
(5) In connection with the private placement conducted during March through June of 2004, Smart Online and the investors executed registration rights agreements. This registration rights agreement required Smart Online to pay investors 2% of their investment for each thirty-day period after July 1, 2004 in which Smart Online failed to file a registration statement registering shares sold in the private placement, which amount is prorated for partial 30-day periods. The registration rights agreements provided that Smart Online could choose to pay this by issuing shares of its common stock in lieu of cash, which Smart Online chose to do. On September 29, 2004, Smart Online issued 58,226 shares of its common stock to satisfy amounts that accrued through September 29, 2004. These shares are included in the shares being registered in this offering.
This offering was conducted pursuant to Rule 506 under Regulation D. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
II-3
(6) In 2001, Smart Online issued to Bank One, a warrant to purchase 619,309 shares of the common stock of Smart Online for an exercise price of $18.00 per share in connection with Smart Online and Bank One entering into a syndication partnering agreement. The warrant contained a weighted average anti-dilution provision, which caused the exercise price of the warrant to decrease to approximately $12.04per share and the number of shares issuable upon exercise of the warrant to increase to approximately 925,789 shares of common stock as of August 1, 2004. To simplify its capital structure, Smart Online offered to issue shares of common stock of Smart Online to Bank One in exchange for cancellation of the warrant. On September 3, 2004, Bank One exchanged the warrant for 100,000 shares of common stock of Smart Online. These shares are included in the shares being registered in this offering.
This exchange offer was conducted under the exemption from registration provided by Section 4(2) of the Securities Act and the rules adopted thereunder. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
(7) During August through September 27, 2004, Smart Online sold 290,000 shares of its common stock to investors in a private placement for a price of $5.00 per share, for an aggregate of $1,450,000. These shares are included in the shares being registered in this offering.
This offering was conducted pursuant to Rule 506 under Regulation D. All the investors are accredited investors. All the investors have prior experience investing in start-up technology companies. All the investors were provided access to all the information they deemed relevant to their investment decisions. All the investors had prior business dealings with one another or with Smart Online. Neither Smart Online nor any person acting on its behalf offered or sold the securities by any general solicitation or general advertising. A legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or exemption from registration.
(8) Since January 1, 2001, Smart Online has issued an aggregate of 1,393,500 shares of its common stock to its directors, officers, employees and consultants under the stock plans described in “Description of Securities” above. These securities were issued under the exemption from registration provided by Rule 701 of the Securities Act.
II-4
ITEM 27. EXHIBITS.
|
Exhibit
Number |
Description |
|
3.1 |
Amended and Restated Certificate of Incorporation |
| 3.2 | Amended and Restated By-Laws |
| 4.1 | Specimen Certificate of Common Stock |
| 5.1 | Form of Opinion of Counsel |
| 10.1 | 2004 Equity Compensation Plan |
| 10.2 | 2001 Equity Compensation Plan |
| 10.3 | 1998 Stock Option Plan |
| 10.4 | Form of Reorganization Lock-up Proxy and Release Agreement dated January 1, 2004, between Online and stockholders of Smart Online |
| 10.5 | Form of Lock-up Agreement dated January 1, 2004 between Smart Online and stockholders of Smart Online |
| 10.6 | Form of Subscription Agreement with lock-up provisions between Smart Online and investors |
| 10.7 | Form of Registration Rights Agreement dated as of February 1, 2004 between Smart Online |
| 10.8 | Form of Employment Agreement dated April 1, 2004 with Michael Nouri |
| 10.9 | Form of Employment Agreement dated April 1, 2004 with Henry Nouri |
| 10.10 | Form of of Employment Agreement dated April 1, 2004 with Ronna Loprete |
| 10.11 | Form of Employment Agreement dated May 1, 2004 with Jose Collazo |
| 10.12 | Form of Employment Agreement dated May 1, 2004 with Anil Kamath |
| 10.13 | Form of Security Agreement dated October 13, 2003 with Smart Online as the Debtor and Michael Henry Nouri, Thomas Furr, Ronna Loprete and Eric Nouri as the Secured Parties |
| 10.14 | Form of $418,749.93 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Michael Nouri |
| 10.15 | Form of $64,602.90 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Michael Nouri |
| 10.16 | Form of $398,383.27 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Henry Nouri |
| 10.17 | Form of $116,507.60 Promissory Note dated April 30, 2004 from Smart Online as the Debtor Thomas Furr |
| 10.18 | Form of $92,500 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Ronna Loprete |
| 10.19 | Form of $47, 740.18 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Eric Nouri |
| 10.20 | Standstill and Interest Modification Agreement dated December 19, 2003 with Michael Nouri |
| 10.21 | Standstill and Interest Modification Agreement dated December 19, 2003 with Henry Nouri |
| 10.22 | Standstill and Interest Modification Agreement dated December 19, 2003 with Thomas Furr |
| 10.23 | Standstill and Interest Modification Agreement dated December 19, 2003 with Ronna Loprete |
| 10.24 | Standstill and Interest Modification Agreement dated December 19, 2003 with Eric Nouri |
| 23.1 | Accountants' Consent |
|
23.2 |
Counsel's Consent to Use Opinion (included in Exhibit 5.1) |
II-5
ITEM 28. UNDERTAKINGS.
The Registrant undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement (the “Registration Statement”):
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after the Effective Date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in this Registration Statement, including (but not limited to) the addition of an underwriter.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be treated as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to any provisions contained in its Amended and Restated Certificate of Incorporation, bylaws, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the registrant of expenses incurred by a director, officer or controlling person of the registrant in connection with the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned in Durham, North Carolina on September 29, 2004.
|
Smart Online, Inc.
By:
/s/ Michael Nouri
|
In accordance with the requirements of the Securities Act of 1933, the registration statement was signed by the following persons in the capacities and on the dates stated:
| SIGNATURE | TITLE |
DATED |
|
/s/ Michael Nouri
Michael Nouri |
President, Chief Executive Officer,
Chief Financial Officer, Principal Accounting Officer and Director |
September 29, 2004 |
|
/s/ Henry Nouri
Henry Nouri |
Vice President and Director | September 29, 2004 |
|
/s/ Ronna Loprete
Ronna Loprete |
Secretary and Director | September 29, 2004 |
|
/s/ Tom Furr
Tom Furr |
Vice President and Director | September 29, 2004 |
II-7
SMART ONLINE, INC.
EXHIBIT INDEX
| Exhibit Number | Description |
|
3.1 |
Amended and Restated Certificate of Incorporation |
| 3.2 | Amended and Restated By-Laws |
| 4.1 | Specimen Certificate of Common Stock |
| 5.1 | Form of Opinion of Counsel |
| 10.1 | 2004 Equity Compensation Plan |
| 10.2 | 2001 Equity Compensation Plan |
| 10.3 | 1998 Stock Option Plan |
| 10.4 | Form of Reorganization Lock-up Proxy and Release Agreement dated January 1, 2004, between Online and stockholders of Smart Online |
| 10.5 | Form of Lock-up Agreement dated January 1, 2004 between Smart Online and stockholders of Smart Online |
| 10.6 | Form of Subscription Agreement with lock-up provisions between Smart Online and investors |
| 10.7 | Form of Registration Rights Agreement dated as of February 1, 2004 between Smart Online |
| 10.8 | Form of Employment Agreement dated April 1, 2004 with Michael Nouri |
| 10.9 | Form of Employment Agreement dated April 1, 2004 with Henry Nouri |
| 10.10 | Form of of Employment Agreement dated April 1, 2004 with Ronna Loprete |
| 10.11 | Form of Employment Agreement dated May 1, 2004 with Jose Collazo |
| 10.12 | Form of Employment Agreement dated May 1, 2004 with Anil Kamath |
| 10.13 | Form of Security Agreement dated October 13, 2003 with Smart Online as the Debtor and Michael Henry Nouri, Thomas Furr, Ronna Loprete and Eric Nouri as the Secured Parties |
| 10.14 | Form of $418,749.93 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Michael Nouri |
| 10.15 | Form of $64,602.90 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Michael Nouri |
| 10.16 | Form of $398,383.27 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Henry Nouri |
| 10.17 | Form of $116,507.60 Promissory Note dated April 30, 2004 from Smart Online as the Debtor Thomas Furr |
| 10.18 | Form of $92,500 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Ronna Loprete |
| 10.19 | Form of $47, 740.18 Promissory Note dated April 30, 2004 from Smart Online as the Debtor to Eric Nouri |
| 10.20 | Standstill and Interest Modification Agreement dated December 19, 2003 with Michael Nouri |
| 10.21 | Standstill and Interest Modification Agreement dated December 19, 2003 with Henry Nouri |
| 10.22 | Standstill and Interest Modification Agreement dated December 19, 2003 with Thomas Furr |
| 10.23 | Standstill and Interest Modification Agreement dated December 19, 2003 with Ronna Loprete |
| 10.24 | Standstill and Interest Modification Agreement dated December 19, 2003 with Eric Nouri |
| 23.1 | Accountants' Consent |
|
23.2 |
Counsel's Consent to Use Opinion (included in Exhibit 5.1) |
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SMART ONLINE, INC.
This Amended and Restated Certificate of Incorporation of Smart Online, Inc., a Delaware corporation originally incorporated as the American Institute for Financial Research, Inc. (the "Corporation") restates, integrates and further amends the provisions of the Corporation's Certificate of Incorporation as originally filed on August 10, 1993, as amended and restated on August 10, 1999, and as heretofore amended and supplemented. This Amended and Restated Certificate of Incorporation was duly approved by the written consent of the holders of a majority of the Corporation's issued and outstanding shares of stock in accordance with Section 228 of the General Corporation Law of the State of Delaware and duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware.
ARTICLE I
The name of the Corporation is Smart Online, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of Delaware is the Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of the registered agent of the Corporation is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
A. The Corporation is authorized to issue two classes of stock to be designated, respectively, Preferred Stock ("Preferred Stock") and Common Stock ("Common Stock"). The total number of shares of capital stock that the Corporation shall have authority to issue is fifty million (50,000,000). The total number of shares of Preferred Stock the Corporation shall have the authority to issue is five million (5,000,000). The total number of shares of Common Stock the Corporation shall have the authority to issue is forty-five million (45,000,000). The Preferred Stock shall have a par value of $0.001 per share and the Common Stock shall have a par value of $0.001 per share.
B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the "Board") is hereby authorized to provide for the issue of all or any of the shares of Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series such voting powers, full or limited, or no
voting powers, and such designations, preferences, and relative, participating, optional, or other rights, and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board providing for the issue of such shares and as may be permitted by the General Corporation Law of the State of Delaware. The Board is also hereby authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.
ARTICLE V
A. The business of the Corporation shall be managed by its Board of Directors, the election of the members of which Board need not be by written ballot.
B. The Board of Directors is authorized to adopt, amend, or repeal Bylaws of the Corporation except as and to the extent provided in such Bylaws.
C. To the fullest extent permitted under current law or future amendments to the law, no director of the Corporation shall be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. As used herein, the term "improper personal benefit" does not include a director's reasonable compensation or other reasonable incidental benefit for or on account of his or her service as director, officer, employee, independent contractor, attorney, or consultant of the Corporation. Any repeal or modification of this section shall be prospective and shall not affect the rights under this section in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. Further, notwithstanding the foregoing provision, in the event that the General Corporation Law of Delaware is amended or enacted to permit further limitation of the personal liability of a director, the personal liability of the Corporation's directors shall be limited or eliminated to the fullest extent permitted by applicable law. In addition, this provision shall not affect any provision permitted under the General Corporation Law of Delaware in the Certificate of Incorporation, bylaws or contract or resolution of the Corporation indemnifying or agreeing to indemnify a director against personal liability.
ARTICLE VI
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
Section 291 of the Delaware General Corporation Law or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Corporation under Section 279 of the Delaware General Corporation Law order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
IN WITNESS WHEREOF, Smart Online, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its President and attested by its Secretary on this 14th day of September, 2004.
SMART ONLINE, INC.
By: /s/ D. Michael Nouri
--------------------
D. Michael Nouri
President
ATTEST:
/s/ Ronna Loprete
-------------------------------
Ronna Loprete
Secretary
|
AMENDED AND RESTATED
BYLAWS
OF
SMART ONLINE, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation shall be located at 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, or at such other place as the Board of Directors shall determine from time to time.
SECTION 2. PRINCIPAL OFFICE AND OTHER OFFICES. The principal office of the Corporation shall be located at such place as the Board of Directors may specify from time to time. The Corporation may have such other offices at such other places, either within or without the State of Delaware, as the Board of Directors may from time to time determine, or as the affairs of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. Meetings of the stockholders of the Corporation shall be held at the such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the principal office of the Corporation required to be maintained pursuant to Article I, Section 2 hereof. The Board of Directors may, in its sole discretion and subject to such guidelines and procedures as the Board of Directors may adopt for such meeting, permit stockholders and proxy holders not present at such meeting to: (i) participate in such meeting of stockholders; and (ii) be deemed present in person and vote at such meeting of stockholders, provided that: (A) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxy holder; (B) the Corporation shall implement reasonable measures to provide stockholders and proxy holders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders; and (C) if any stockholder or proxy holder votes or takes other action at the meeting by means of remote communication, the Corporation shall maintain a record of such vote or other action.
SECTION 2. ANNUAL MEETINGS. The annual meeting of the stockholders shall be held during the month of June of each year at such time and place as the Board of Directors shall determine, at which time the stockholders shall elect a Board of Directors and transact such other business as may be properly brought before the meeting. Notwithstanding the foregoing, the Board of Directors may cause the annual meeting of stockholders to be held on such other date in any year as they shall determine to be in the best interest of the Corporation, and any business transacted at said meeting shall have the same validity as if transacted on the date designated herein.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or the
Amended and Restated Certificate of Incorporation, may be called by the Chairman
of the Board, Chief Executive Officer or President. The President or Secretary
shall call a special meeting when: (i) requested in writing by any two or more
of the directors, or one director if only one director is then in office; or
(ii) requested in writing
by stockholders owning a majority of the shares entitled to vote. Such written request shall state the purpose or purposes of the proposed meeting.
SECTION 4. NOTICE. Except as otherwise required by statute or the Certificate of Incorporation, written notice of each meeting of the stockholders, whether annual or special, shall be served, either personally, by mail or private carrier, or by facsimile, electronic mail or other electronic means, upon each stockholder of record entitled to vote at such meeting, not less than ten (10) nor more than sixty (60) days before the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice shall be sent by facsimile, electronic mail or other electronic means only to stockholders who have agreed to receive notice by electronic means and who have not revoked such agreement. Notice of any meeting of stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The notice shall also state the means of remote communication, if any, by which stockholders and proxy holders may be deemed present in person and vote at such meeting. Notice of any meeting of stockholders shall not be required to be given to any stockholder who, in person or by his authorized attorney, either before or after such meeting, shall waive such notice in writing. Attendance of a stockholder at a meeting, either in person or by proxy, shall itself constitute waiver of notice and waiver of any and all objections to the place and time of the meeting and manner in which it has been called or convened, except when a stockholder attends a meeting solely for the purpose of stating, at the beginning of the meeting, any such objections to the transaction of business. Notice of the time and place of any adjourned meeting need not be given otherwise than by the announcement at the meeting at which adjournment is taken, unless the adjournment is for more than thirty (30) days or after the adjournment a new record date is set.
SECTION 5. PROXIES. A stockholder may attend, represent, and vote his shares at any meeting in person, or be represented and have his shares voted for by a proxy which such stockholder has duly executed in writing. No proxy shall be valid after three (3) years from the date of its execution unless a longer period is expressly provided in the proxy. Each proxy shall be revocable unless otherwise expressly provided in the proxy or unless otherwise made irrevocable by law.
SECTION 6. QUORUM. The holders of a majority of the stock issued, outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders and shall be required for the transaction of business, except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. When a quorum is present at the original meeting, any business which might have been transacted at the original meeting may be transacted at an adjourned meeting, even when a quorum is not present at the adjourned meeting. The stockholders at a meeting at which a quorum is initially present may continue to do business until adjournment, notwithstanding the withdrawal of sufficient stockholders to leave less than a quorum. If, however, such majority shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting unless the adjournment is for more than thirty (30) days or after the adjournment a new record date is set, until the required amount of voting stock shall be present. At such adjourned meeting at which a quorum shall be present in person or by proxy, any business may be transacted that might have been transacted at the meeting originally called.
SECTION 7. VOTING OF SHARES. Each outstanding share of voting capital stock of the Corporation shall be entitled to one vote on each matter submitted to a vote at a meeting of the stockholders, except as otherwise provided in the Amended and Restated Certificate of Incorporation. The vote by the holders of a majority of the shares voted on any matter at a meeting of stockholders at which a quorum is present shall be the act of the stockholders on that matter, unless the vote of a greater number is required by law, by the Amended and Restated Certificate of
Incorporation, or by these Bylaws; provided, however, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Voting on all matters except the election of directors shall be by voice vote or show of hands unless the holders of ten percent (10%) of the shares represented at the meeting shall, prior to voting on any matter, demand a written ballot on that particular matter. All elections of directors shall be by written ballot, unless otherwise provided in the Amended and Restated Certificate of Incorporation. Shares of its own stock owned by the Corporation, directly or indirectly, through a subsidiary or otherwise, shall not be voted and shall not be counted in determining the number of shares entitled to vote; except that shares held in a fiduciary capacity may be voted and shall be counted except to the extent provided by law.
SECTION 8. ACTION WITHOUT MEETING.
(a) Any action required or permitted to be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
(b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no consent shall be effective to take the corporate action referred to in such consent unless, within sixty (60) days of the earliest dated consent delivered to the Corporation in the manner required in these Bylaws, written consents signed by a sufficient number of stockholders to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.
(c) A telegram, electronic mail or other electronic
transmission consenting to action to be taken and transmitted by a stockholder
or proxy holder, or by a person or persons authorized to act for a stockholder
or proxy holder, shall be deemed to be written, signed and dated, as required by
Section 228 of the General Corporation Law of Delaware and by these Bylaws,
provided that any such telegram, electronic mail or other electronic
transmission sets forth or is delivered with information from which the
Corporation can determine: (i) that the telegram, electronic mail or other
electronic transmission was transmitted by the stockholder, proxy holder or
person authorized to act for the stockholder or proxy holder; and (ii) the date
on which such stockholder, proxy holder or authorized person(s) transmitted such
telegram, electronic mail or other electronic transmission. The date on which
such telegram, electronic mail or other electronic transmission is transmitted
shall be deemed to be the date on which such consent was signed. Unless
otherwise provided by resolution of the Board of Directors, no consent given by
telegram, electronic mail or other electronic transmission shall be deemed to
have been delivered until such consent is reproduced in paper form and until
such paper form shall be delivered to the Corporation by delivery to its
registered office, its principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be made by and or by certified or registered mail, return receipt
requested.
(d) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by the stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu
of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware.
SECTION 9. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete alphabetical list of the stockholders entitled to vote at the meeting, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present.
SECTION 10. INSPECTORS OF ELECTION.
(a) APPOINTMENT OF INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the Board of Directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of any such meeting may appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors in advance of the meeting or at the meeting by the person acting as chairman.
(b) DUTIES OF INSPECTORS. The inspectors of elections shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine the results and do such acts as may be proper to conduct the election or vote with fairness to all stockholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as possible.
(c) VOTE OF INSPECTORS. If there are three (3) inspectors of election the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all.
(d) REPORT OF INSPECTORS. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by the Board of Directors, except as otherwise provided by law, by the Certificate of Incorporation of the Corporation or by these Bylaws.
SECTION 2. NUMBER AND QUALIFICATIONS. The authorized number of directors shall be determined from time to time by resolution of the Board of Directors, provided that the number of directors shall be four (4) until otherwise fixed by the Board of Directors and provided further that any decrease in the number of directors shall not shorten an incumbent director's term of office. Each director shall hold office until his death, resignation, retirement, removal, disqualification, or
his successor is elected and qualifies. Directors need not be residents of the State of Delaware or stockholders of the Corporation.
SECTION 3. ELECTION AND CLASSIFICATION OF DIRECTORS; TERM.
(a) Except as otherwise specifically provided herein, the directors shall be elected for annual terms at the annual meeting of stockholders (or by written consent in lieu of such meeting) and such directors, as provided in Section 7 of Article II, shall be elected by a plurality of the votes of the shares present or represented by proxy at the meeting (or executing the written consent in lieu of such meeting) and entitled to vote in the election of directors.
(b) At the first annual meeting following such time as the number of directors of the Corporation to serve is increased to at least six (6) (or such greater number as may be required under the General Corporation Law of the State of Delaware), and for so long as the number to serve remains at least six (6), the Board of Directors shall be classified with respect to the time for which they shall respectively hold office into three classes designated Class I, Class II and Class III, as nearly equal in number as possible. The Board of Directors shall make the initial determination as to which of its members shall be classified as Class I, Class II or Class III directors. Each director shall then serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided however that the directors first elected to Class I shall serve for a term ending on the annual meeting next following the end of the fiscal year in which the directors first become classified, the directors first elected to Class II shall serve for a term ending on the next succeeding annual meeting, and the directors first elected to Class III shall serve for a term ending on the second succeeding annual meeting. Notwithstanding the foregoing, each director shall hold office until his death, resignation, retirement, removal, disqualification, or his successor is elected and qualifies.
(c) At each annual election after such time as the directors have been classified as provided above, directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless by reason of any intervening change in the authorized number of directors, the Board shall designate one or more directorships whose term then expires as directorships of another class in order to more nearly achieve equality of number of directors among the classes. Notwithstanding the rule that the three classes shall be as nearly equal in number as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue to serve as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. Newly created directorship shall, consistent with the rule that the three classes shall be as nearly equal in number of directors as possible, be allocated to that of the available class whose term of office is due to expire at the earliest date following such allocation.
SECTION 4. REMOVAL. At a special meeting of the stockholders called for the purpose and in the manner provided in these Bylaws, subject to any limitations imposed by law or the Amended and Restated Certificate of Incorporation, the Board of Directors, or any individual director, may be removed from office, but only for cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors.
SECTION 5. RESIGNATION. Any director of the Corporation may resign at any time by giving written notice to the President or the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of such notice or at such later time as shall be specified in such notice. The acceptance of such resignation shall not be necessary to make it effective.
SECTION 6. VACANCIES. Any vacancy in the Corporation's Board of Directors, including, without limitation, any vacancy created by an increase in the authorized number of directors or resulting from the stockholders' failure to elect the full authorized number of directors, may be filled
by the vote of a majority of the remaining directors then in office, though less than a quorum. If the vacant office was held by a director elected by a voting group, only the remaining director or directors elected by that voting group or the holders of shares of that voting group are entitled to fill the vacancy. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. The stockholders may elect a director at any time to fill a vacancy not filled by the directors.
SECTION 7. COMPENSATION. The Board of Directors may cause the Corporation to compensate directors for their services as directors and may provide for payment by the Corporation of all expenses incurred by directors in attending regular and special meetings of the Board.
ARTICLE IV
MEETINGS OF DIRECTORS
SECTION 1. ANNUAL AND REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held immediately after, and at the same place as, the annual meeting of stockholders. In addition, the Board of Directors may provide, by resolution, for the holding of additional regular meetings.
SECTION 2. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or any two or more directors, or one director if only one director is then in office. Such meetings may be held at the time and place designated in the notice of the meeting.
SECTION 3. NOTICE OF MEETINGS.
(a) Regular meetings of the Board of Directors may be held without notice. Written notice of the time and place of all special meetings of the Board of Directors shall be given no later than 5:00 p.m. in the time zone of the principal office of the Corporation on a date after which at least two business days intervene before the date of the meeting; such notice need not specify the purpose for which the meeting is called. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance at such meeting, except when the director attends the meeting for the express purposes of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called of convened. Notice of an adjourned meeting need not be given if the time and place are fixed at the meeting adjourning and if the period of adjournment does not exceed ten (10) days in any one adjournment.
(b) The transaction of all business at any meeting of the Board of Directors, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in any written waiver of notice or consent unless so required by the Certificate of Incorporation or these Bylaws. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meetings.
SECTION 4. QUORUM. At all meetings of the Board of Directors, the presence of a majority of the directors then in office shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present at any meeting may adjourn from time to
time until a quorum is constituted. Notice of the time and place of any adjourned meeting need only be given by announcement at the meeting at which adjournment is taken.
SECTION 5. MANNER OF ACTING. Except as otherwise provided by law, these Bylaws or the Amended and Restated Certificate of Incorporation, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.
SECTION 6. ACTION WITHOUT MEETING. Unless otherwise restricted by the Amended and Restated Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if all members of the Board of Directors consent in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors.
SECTION 7. TELEPHONIC MEETINGS. Members of the Board of Directors may
participate in a meeting of such Board by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
ARTICLE V
COMMITTEES OF THE BOARD
SECTION 1. CREATION. The Board of Directors may designate one (1) or more directors to constitute a Executive Committee or other committees, each of which, to the extent authorized by law and provided in the resolution shall have and may exercise all of the authority delegated to the Executive Committee or other committee by the Board of Directors in the management of the Corporation, except as set forth in Section 7, below.
SECTION 2. VACANCY. Any permanent vacancy occurring on a committee shall be filled by the Board of Directors.
SECTION 3. REMOVAL. Any member of a committee may be removed at any time, with or without cause, by the Board of Directors.
SECTION 4. PROCEDURES AND MINUTES. Any such committee shall elect a presiding officer from among its members and may fix its own rules of procedure, which may not be inconsistent with these Bylaws. Each committee shall keep regular minutes of its proceedings and report the same to the Board when required.
SECTION 5. MEETINGS; QUORUM. Regular meetings of any such committee may be held without notice at such time and place as such committee may fix by resolution. Special meetings of any such committee may be called by any member thereof upon not less than one (1) days' notice stating the place and time of such meeting, which notice may be written or oral, and if mailed, shall be deemed delivered when deposited in the United States mail addressed to any member of the committee at his business address. Any member of the committee may waive notice of meeting and no notice of meeting need be given to any member thereof who attends in person. The notice of a meeting of a committee need not state the business proposed to be transacted at the meeting. A majority of the members of any such committee shall constitute a quorum for the transaction of business at any meeting thereof, and actions of such committee must be authorized by the affirmative
vote of a majority of the members pursuant to a meeting at which a quorum is present. In the absence or disqualification of a member of the committee, the member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified member.
SECTION 6. RESPONSIBILITY OF DIRECTORS. The designation of a Executive Committee or other committee and the delegation thereto of authority shall not alone operate to relieve the Board of Directors or any member thereof, of any responsibility or liability imposed upon it or him by law.
SECTION 7. RESTRICTIONS ON COMMITTEES. Neither the Executive
Committee nor any other committee shall have the authority to: (a) approve or
adopt or recommend to the stockholders, any action or matter expressly required
by the Delaware General Corporation Law to be submitted to the stockholders for
approval; (b) adopt, amend or repeal Bylaws; (c) amend the Amended and Restated
Certificate of Incorporation; (d) authorize distributions; (e) fill vacancies on
the Board of Directors or on any of its committees, except as provided in
Section 5, above; (f) approve a plan of merger not requiring stockholder
approval; (g) authorize or approve reacquisition of shares, except according to
a formula or method prescribed by the Board of Directors; (h) authorize or
approve the issuance or sale or contract for sale of shares, or determine the
designation and relative rights, preferences, and limitations of a class or
series of shares, except within limits specifically prescribed by the Board of
Directors; (i) fix compensation of the directors for serving on the Board or on
any committee; or (j) amend or repeal any resolution of the Board of Directors
which by its terms shall not be so amendable or repealable.
ARTICLE VI
OFFICERS
SECTION 1. OFFICERS. The Board of Directors shall elect a President and a Secretary or Assistant Secretary, and may elect or appoint a chief executive officer, one or more vice presidents, one or more assistant secretaries, a treasurer or chief financial officer, and other or additional officers as in its opinion are desirable for conduct of the business of the Corporation. The Board of Directors may elect from its own membership a Chairman of the Board. The Board of Directors may by resolution empower any officer or officers of the Corporation to appoint from time to time such vice presidents and other or additional officers as in the opinion of the officer(s) so empowered by the Board are desirable for the conduct of the business of the Corporation. Any two or more offices may be held by the same person. In no event, however, may an officer act in more than one capacity where action of two or more officers is required.
SECTION 2. ELECTION AND TERM. Each officer of the Corporation shall hold office for the term for which he is elected or appointed, and until his successor has been duly elected or appointed and has qualified, or until his death, resignation or removal pursuant to these Bylaws. Elections by the Board of Directors may be held at any regular or special meeting of the Board.
SECTION 3. REMOVAL. Any officer elected by the Board may be removed, either with or without cause, by a vote of the Board of Directors. Any officer appointed by another officer or officers may be removed, either with or without cause, by either a vote of the Board of Directors or by the officer or officers given the power to appoint that officer. The removal of any person from office shall be without prejudice to the contract rights, if any, of the person so removed.
SECTION 4. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or Secretary of the Corporation. Any such resignation shall take effect upon receipt of the notice.
SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, shall be filled for the unexpired portion of the term in the manner prescribed by these Bylaws for regular appointment or elections to such offices.
SECTION 6. COMPENSATION. The compensation of all officers of the Corporation shall be fixed by the Board of Directors, except that the Board may delegate to any officer who has been given the power to appoint subordinate officers, the authority to fix the salaries of such appointed officers. No officer shall be prevented from receiving a salary as an officer by reason of the fact that the officer is also a member of the Board of Directors.
SECTION 7. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors, if elected, shall preside at all meetings of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or by these Bylaws.
SECTION 8. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if elected, shall be the principal executive officer of the Corporation and shall preside at meetings of the Board of Directors in the absence of the Chairman of the Board. The Chief Executive Officer shall be subject to the control and direction of the Board of Directors, and shall supervise and control the management of the Corporation.
SECTION 9. PRESIDENT. If no Chief Executive Officer is elected, the President shall be the principal executive officer of the Corporation, and shall preside at meetings of the Board of Directors in the absence of the Chairman of the Board and the Chief Executive Officer. The President shall be subject to the control and direction of the Board of Directors, and in general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer from time to time.
SECTION 10. VICE PRESIDENTS. In the absence or disability of the President or in the event of his death, inability or refusal to act, the Vice Presidents, in the order of their length of service as such, unless otherwise determined by the Board of Directors, shall perform the duties and exercise the powers of the President. In addition, the Vice President shall perform such other duties and have such other powers as the Board of Directors shall prescribe. Vice Presidents shall not be executive officers of the Corporation except as designated by the Board of Directors.
SECTION 11. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, and shall record all acts and proceedings of such meetings in the minute book of the Corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.
SECTION 12. CHIEF FINANCIAL OFFICER OR TREASURER AND ASSISTANT TREASURER. The Chief Financial Officer or Treasurer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner, and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of Directors or the President. The
Chief Financial Officer or Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Corporation. The Corporation shall mail the annual financial statements, or a written notice of their availability, to each stockholder within one hundred twenty (120) days of the close of each fiscal year. The Chief Financial Officer or Treasurer shall perform other duties commonly incident to this office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer or Treasurer in the absence or disability of the Chief Financial Officer or Treasurer, and each Assistant Treasurer shall perform other duties commonly incident to this office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.
SECTION 13. CONTROLLER AND ASSISTANT CONTROLLER. The Controller, if one has been appointed, shall have charge of the accounting affairs of the Corporation and shall have such other powers and perform such other duties as the Board of Directors shall designate. Each Assistant Controller shall have such powers and perform such duties as may be assigned by the Board of Directors and the Assistant Controllers shall exercise the powers of the Controller during that officer's absence or inability to act.
SECTION 14. DUTIES OF OFFICERS MAY BE DELEGATED. In case of the absence of any officer of the Corporation or for any other reason that the Board may deem sufficient, the Board may delegate the powers or duties of such officer to any other officer or to any director for the time being provided a majority of the entire Board of Directors concurs in such delegation.
SECTION 15. BONDS. The Board of Directors may, by resolution, require any or all officers, agents and employees of the Corporation to give bond to the Corporation, with sufficient securities, conditioned on faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the Board of Directors.
ARTICLE VII
CAPITAL STOCK AND TRANSFER OF SAME
1. CERTIFICATES FOR SHARES. Certificates representing shares of the Corporation shall be issued, in such form as the Board of Directors shall determine, to every stockholder for the fully paid shares owned by him. These certificates shall be signed by the President or any Vice President or a person who has been designated as the chief executive officer of the Corporation and by the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer and sealed with the seal of the Corporation or a facsimile thereof. The signatures of any such officers upon a certificate may be facsimiles or may be engraved or printed or omitted if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer who has signed or whose facsimile or other signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. The certificates shall be consecutively numbered or otherwise identified; and the name and address of the persons to whom they are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation.
2. TRANSFER OF SHARES. Transfer of shares shall be made on the stock transfer books of the Corporation only upon surrender of the certificates for the shares sought to be transferred by the record holder thereof or by his duly authorized agent, transferee or legal representative. All
certificates surrendered for transfer shall be cancelled before new certificates for the transferred shares shall be issued.
3. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents and one or more registrars of transfer and may require all stock certificates to be signed or countersigned by the transfer agent and registered by the registrar of transfers.
4. CLOSING TRANSFER BOOKS AND FIXING RECORD DATE.
(a) For the purpose of determining the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting. If no record
date is fixed by the Board of Directors, such record date shall be at the close
of business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. Such determination of stockholders of record shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) For the purpose of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, such record date, when no prior action by the Board of Directors is required by this chapter, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is filed with the Secretary of the Corporation. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware Corporation Law, such record date shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
(c) For the purpose of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
5. LOST CERTIFICATES. The Board of Directors may authorize the issuance of a new share certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. When authorizing such issuance of a new certificate, the Board may require the claimant to give the Corporation a bond in such sum as it may direct to indemnify the Corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the Board may, by resolution reciting that the circumstances justify such action, authorize the issuance of the new certificate without requiring such a bond.
6. HOLDER OF RECORD. The Corporation may treat as absolute owner of the shares the person in whose name the shares stand of record on its books just as if that person had full competency, capacity, and authority to exercise all rights of ownership irrespective of any knowledge or notice to the contrary or any description indicating a representative, pledge or other fiduciary relation or any reference to any other instrument or to the rights of any other person appearing upon its record or upon the share certificate; except that any person furnishing to the Corporation proof of his appointment as a fiduciary shall be treated as if he were a holder of record of the Corporation's shares.
7. TREASURY SHARES. Treasury shares of the Corporation shall consist of such shares as have been issued and thereafter acquired but not cancelled by the Corporation. Treasury shares shall not carry voting or dividend rights, except rights in share dividends.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. DISTRIBUTIONS TO STOCKHOLDERS. The Board of Directors may from time to time authorize, and the Corporation may make, distributions to its stockholders (including, without limitation, dividends and distributions involving acquisition of the Corporation's shares) in the manner and upon the terms and conditions provided by law, and subject to the provisions of its Certificate of Incorporation.
SECTION 2. SEAL. The seal of the Corporation shall be in such form as the Board of Directors may from time to time determine.
SECTION 3. DEPOSITORIES AND CHECKS. All funds of the Corporation shall be deposited in the name of the Corporation in such bank, banks, or other financial institutions as the Board of Directors may from time to time designate and shall be drawn out on checks, drafts or other orders signed on behalf of the Corporation by such person or persons as the Board of Directors may from time to time designate.
SECTION 4. LOANS. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or defined to specific instances.
SECTION 5. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by the Board of Directors.
SECTION 6. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument on behalf of the Corporation, and such authority may be general or confined to specific instances.
ARTICLE IX
AMENDMENTS
The Bylaws of the Corporation may be altered or amended and new Bylaws may be adopted by the stockholders or, if authorized by the Certificate of Incorporation, by the Board of Directors at any regular or special meeting of the Board of Directors; provided, however, that, if such action is to be taken at a meeting of the stockholders, notice of the general nature of the proposed change in the
Bylaws shall have been given in the notice of a meeting. Action by the stockholders with respect to Bylaws shall be taken by an affirmative vote of a majority of the shares entitled to elect directors, and action by the directors with respect to Bylaws shall be taken by an affirmative vote of a majority of all directors then holding office.
ARTICLE X
INDEMNIFICATION AND REIMBURSEMENT OF DIRECTORS AND OFFICERS
1. INDEMNIFICATION FOR EXPENSES AND LIABILITIES. Any person who at
any time serves or has served (i) as a director, officer, employee or agent of
the Corporation, (ii) at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, or (iii) at the request
of the Corporation as a trustee or administrator under an employee benefit plan,
or is called as a witness at a time when he or she has not been made a named
defendant or respondent to any Proceeding, shall have a right to be indemnified
by the Corporation to the fullest extent from time to time permitted by law
against Liability and Expenses in any Proceeding (including without limitation a
Proceeding brought by or on behalf of the Corporation itself) arising out of his
or her status as such or activities in any of the foregoing capacities. The
Board of Directors of the Corporation shall take all such action as may be
necessary and appropriate to authorize the Corporation to pay the
indemnification required by this provision, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him
or her. Any person who at any time serves or has served in any of the aforesaid
capacities for or on behalf of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the rights provided for
herein. Any repeal or modification of these indemnification provisions shall not
affect any rights or obligations existing at the time of such repeal or
modification. The rights provided for herein shall inure to the benefit of the
legal representatives of any such person and shall not be exclusive of any other
rights to which such person may be entitled apart from this provision. The
rights granted herein shall not be limited by the provisions contained in
Section 145 of the Delaware Corporation Law or any successor to such statute.
The rights granted herein shall not be exclusive of any other rights which an
indemnified person may have or hereafter acquire under any statute, provision of
the Amended and Restated Certificate of Incorporation, these bylaws, agreement,
vote of stockholders or disinterested directors, or otherwise.
2. ADVANCE PAYMENT OF EXPENSES. The Corporation shall (upon receipt of an undertaking by or on behalf of the director, officer, employee or agent involved to repay the Expenses described herein unless it shall ultimately be determined that he or she is entitled to be indemnified by the Corporation against such Expenses) pay Expenses incurred by such director, officer, employee or agent in defending a Proceeding or appearing as a witness at a time when he or she has not been named as a defendant or a respondent with respect thereto in advance of the final disposition of such Proceeding.
3. INSURANCE. The Corporation shall have the power to purchase and maintain insurance (on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan) against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability.
4. OTHER INDEMNIFICATION. The Corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other entity shall be reduced by any amount such person may collect as indemnification from such other entity.
5. DEFINITIONS. The following terms as used in this Article shall have the following meanings. "Proceeding" means any threatened, pending or completed action, suit, or proceeding and any appeal therein (and any inquiry or investigation that could lead to such action, suit, or proceeding), whether civil, criminal, administrative, investigative or arbitrative and whether formal or informal. "Expenses" means expenses of every kind, including counsel fees. "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), reasonable expenses incurred with respect to a Proceeding, and all reasonable expenses incurred in enforcing the indemnification rights provided herein. "Director," "officer," "employee" and "agent" include the estate or personal representative of a director, officer, employee or agent. "Corporation" shall include any domestic or foreign predecessor of this Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction.
/s/ Ronna Loprete
------------------------
Secretary
September 14, 2004
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Exhibit 4.1
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NUMBER |
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INCORPORATED UNDER THE LAWS OF THE STATE OF
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SHARES |
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SMART ONLINE, INC.
See Reverse for
PAR VALUE $0.001 EACH COMMON STOCK This is to Certify that _______________________________________ is the owner of _________________________________________________________ fully paid and non-assessable shares of the above Corporation transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
________________________ ____________________________________
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The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
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TEN COM |
- as tenants in common |
UNIF TRANSFER MIN ACT- ................ Custodian............... |
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(Cust) (Minor) |
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TEN ENT |
- as tenants by the entireties |
under uniform Transfers to Minors
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Jt ten |
- as joint tenants with right of
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(State) |
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Additional abbreviations may also be used though not in the above list |
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For value received ___ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
________________________________________________________________________________________________________________________________________________________________________________________________________________________
Shares
represented by the within Certificate, and do hereby irrevocably constitute and appoint
________________________________________Attorney to transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated_________
___________________________________
In presence of
_______________________________________
EXHIBIT 5.1
Daniels Daniels & Verdonik, P.A.
1822 NC Highway 54 East, Suite 200
Durham, North Carolina 27713
September 29, 2004
Smart Online, Inc.
Post Office Box 12794
Research Triangle Park, North Carolina 27709-2794
RE: SMART ONLINE, INC. (THE "COMPANY") REGISTRATION STATEMENT ON
FORM SB-2 FOR 1,699,993 SHARES OF COMMON STOCK
To Whom it May Concern:
At your request, we have examined the Registration Statement on Form SB-2 filed by Smart Online, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission (the "Commission") on or about September 29, 2004, (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of One Million Six Hundred Ninty-Nine Thousand Nine Hundred Ninety-Three (1,699,993) shares of the Company's Common Stock (the "Shares"), all of which are to be sold or distributed by selling security holders.
In rendering this opinion, we have examined the following:
- the Registration Statement, together with the Exhibits filed as a part thereof or incorporated therein by reference;
- the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in the Company's minute books; and
- the Company's stock transfer ledger stating the number of the Company's issued and outstanding shares of capital stock as of September 29, 2004.
In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all persons or entities executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due
Smart Online, Inc.
September 29, 2004
authorization, execution and delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof.
We have also assumed that the certificates representing the Shares have been, or will be when issued, properly signed by authorized officers of the Company or their agents.
As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from records and documents referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; however, we are not aware of any facts that would cause us to believe that the opinion expressed herein is not accurate.
This opinion opines upon Delaware law, including the statutory provisions, all applicable provisions of the Delaware constitution and reported judicial decisions interpreting those laws.
Based upon the foregoing, it is our opinion that the Shares to be sold or distributed by the selling security holders pursuant to the Registration Statement, when payment for the Shares is received by the Company in accordance with the resolutions adopted by the Board of Directors of the Company, will be validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement and related Prospectus and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. This opinion is intended solely for use in connection with the issuance and sale of shares subject to the Registration Statement and is not to be relied upon for any other purpose.
Very truly yours,
Daniels Daniels & Verdonik, P.A.
/s/ Daniels Daniels & Verdonik, P.A. |
SMART ONLINE, INC.
SMART ONLINE, INC. 2004 EQUITY COMPENSATION PLAN
EFFECTIVE AS OF MARCH 31, 2004
SMART ONLINE, INC. EQUITY COMPENSATION PLAN
ARTICLE I - GENERAL PROVISIONS
1.1 The Plan is designed, for the benefit of the Company, to attract and retain for the Company personnel of exceptional ability; to motivate such personnel through added incentives to make a maximum contribution to greater profitability; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to equity compensation.
1.2 Awards under the Plan may be made to Participants in the form of (i) Incentive Stock Options, (ii) Nonqualified Stock Options; (iii) Restricted Stock, and/or (iv) Stock Awards.
1.3 The Plan shall be effective March 31, 2004 (the "EFFECTIVE DATE").
ARTICLE II - DEFINITIONS
Except where the context otherwise indicates, the following definitions apply:
2.1 "ACT" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered.
2.2 "AGREEMENT" means the written agreement evidencing each Award granted to a Participant under the Plan.
2.3 "AWARD" means an award granted to a Participant of a Stock Option or Restricted Stock or a Stock Award or any combination thereof.
2.4 "BOARD" means the Board of Directors of the Company.
2.5 "CODE" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.
2.6 "COMMITTEE" means the committee consisting of TWO OR MORE members of the Board as may be appointed by the Board to administer this Plan pursuant to Article III or for such limited purposes as may be provided by the Board. In the event the Board does not appoint such committee, all references to the "Committee" herein shall mean the Board.
2.7 "COMPANY" means Smart Online, Inc., a Delaware corporation, and its successors and assigns.
2.8 "DISABILITY," with respect to any Incentive Stock Option, means disability as determined under Code section 22(e)(3), and with respect to any other Award, means (i) with respect to a Participant who is eligible to participate in the Employer's program of long-term disability insurance, if any, a condition with respect to which the Participant is entitled to commence benefits under such program of long-term disability insurance, or (ii) with respect to any Participant
(including a Participant who is eligible to participate in the
Employer's program of long-term disability insurance, if any), a
disability as determined under procedures established by the Committee
or in any Award.
2.9 "ELIGIBLE PARTICIPANT" means an employee of the Employer (including an
officer), as shall be determined by the Committee, as well as any other
person or entity, including a non-employee member of the Board or a
consultant who provides or has provided services to the Employer,
subject to limitations as may be provided by the Code, the Act or the
Committee, as shall be determined by the Committee.
2.10 "EMPLOYER" means the Company and its parent and subsidiary corporations
(within the meaning of Code sections 424(e) and (f)) during any relevant
period. With respect to all purposes of the Plan, including, but not
limited to, the establishment, amendment, termination, operation and
administration of the Plan, the Company shall be authorized to act on
behalf of all other entities included within the definition of
"Employer."
2.11 "FAIR MARKET VALUE" means the value of a share of Stock, as determined
in good faith by the Committee; provided, however, that
(a) if the Stock is listed on a national securities exchange, Fair
Market Value on a date shall be the closing sale price reported
for the Stock on such exchange on such date if at least 100
shares of Stock were sold on such date or, if fewer than 100
shares of stock were sold on such date, then Fair Market Value
on such date shall be the closing sale price reported for the
Stock on such exchange on the last prior date on which at least
100 shares were sold, all as reported in THE WALL STREET JOURNAL
or such other source as the Committee deems reliable; and
(b) if the Stock is not listed on a national securities exchange but
is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System or other
comparable quotation system, Fair Market Value on a date shall
be the last sale price reported for the Stock on such system on
such date if at least 100 shares of Stock were sold on such date
or, if fewer than 100 shares of Stock were sold on such date,
then Fair Market Value on such date shall be the average of the
high bid and low asked prices reported for the Stock on such
system on such date or, if no shares of Stock were sold on such
date, then Fair Market Value on such date shall be the last sale
price reported for the Stock on such system on the last date on
which at least 100 shares of Stock were sold, all as reported in
THE WALL STREET JOURNAL or such other source as the Committee
deems reliable; and
(c) If the Stock is not traded on a national securities exchange or
reported by a national quotation system, if any broker-dealer
makes a market for the Stock, then the Fair Market Value of the
Stock on a date shall be the average of the highest and lowest
quoted selling prices of the Stock in such market on such date
if at least 100 shares of Stock were sold on such date or, if
fewer than 100 shares of Stock were sold on such date, then Fair
Market Value on such date shall be the average of the high bid
and low asked prices for the Stock in such market on such date
or, if no prices are quoted on such date, then Fair Market Value
on such date shall be the average of the highest and lowest
quoted selling prices of the Stock in such market on the last
date on which at least 100 shares of Stock were sold.
(d) if the Stock is not traded on any national securities exchange
or reported on nay national quotation system and if no
broker-dealer makes a market in the Stock, then
2
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the Fair Market Value of the Stock shall be the value determined
by the Committee using any reasonable means selected by the
Committee.
Further, in all cases, the Committee shall determine Fair Market Value
in connection with an Incentive Stock Option in accordance with Code
section 422 and the rules and regulations thereunder.
2.12 "INCENTIVE STOCK OPTION" means a Stock Option granted to an Eligible
Participant under Article IV of the Plan.
2.13 "NONQUALIFIED STOCK OPTION" means a Stock Option granted to an Eligible
Participant under Article V of the Plan.
2.14 "OPTION GRANT DATE" means, as to any Stock Option, the latest of:
(a) the date on which the Committee takes action to grant the Stock
Option to the Participant;
(b) the date the Participant receiving the Stock Option becomes an
employee of the Employer, to the extent employment status is a
condition of the grant or a requirement of the Code or the Act;
or
(c) such other date (later than the dates described in (a) and (b)
above) as the Committee may designate.
2.15 "PARTICIPANT" means an Eligible Participant to whom an Award has been
granted and who has entered into an Agreement evidencing the Award.
2.16 "PLAN" means the Smart Online, Inc. 2004 Equity Compensation Plan, as
amended from time to time.
2.17 "PUBLIC OFFERING" means any underwritten public offering by the Company
of its equity securities pursuant to an effective registration statement
filed under the Securities Act of 1933, including the Company's initial
public offering.
2.18 "RESTRICTED STOCK" means an Award of Stock under Article VII of the
Plan, which Stock is issued with such restriction(s) as the Committee,
in its sole discretion, may impose, including without limitation, any
restriction on the right to sell, transfer, pledge or assign such Stock,
to vote such Stock, and/or to receive any cash dividends with respect to
such Stock, which restrictions may lapse separately or in combination at
such time or times, in installments or otherwise, as the Committee may
deem appropriate.
2.19 "RESTRICTION PERIOD" means the period commencing on the date an Award of
Restricted Stock is granted and ending on such date as the Committee
shall determine.
2.20 "RETIREMENT" means retirement from active employment with the Employer,
as determined by the Committee.
2.21 "STOCK" means shares of common stock of the Company as may be adjusted
pursuant to the provisions of Section 3.10.
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2.22 "STOCK AWARD" means an Award of Stock granted as payment of
compensation, as provided in Article VIII of the Plan.
2.23 "STOCK OPTION" means an Incentive Stock Option granted under Article IV
or a Nonqualified Stock Option granted under Article V herein. A Stock
Option granted under the Plan shall be designated as either an Incentive
Stock Option or a Nonqualified Stock Option and, in the absence of such
designation, shall be treated as a Nonqualified Stock Option.
2.24 "TERMINATION OF SERVICE" means, with respect to a Participant, the
discontinuance of the Participant's service relationship with the
Employer, including but not limited to service as an employee of the
Employer, as a non-employee member of the board of directors of any
entity constituting the Employer, as an independent contractor
performing services for the Employer, or as a consultant to the
Employer. Except to the extent provided otherwise in an Agreement or
determined otherwise by the Committee, a Termination of Service shall
not be deemed to have occurred if the capacity in which the Participant
provides service to the Employer changes (for example, a change from
consultant status to employee status) or if the Participant transfers
among the various entities constituting the Employer, so long as there
is no interruption in the provision of service by the Participant to the
Employer. The determination of whether a Participant has incurred a
Termination of Service shall be made by the Committee in its discretion.
A Participant shall not be deemed to have incurred a Termination of
Service if the Participant is on military leave, sick leave, or other
bona fide leave of absence approved by the Employer of 90 days or fewer
(or any longer period during which the Participant is guaranteed
reemployment by statute or contract.) In the event a Participant's leave
of absence exceeds this period, he will be deemed to have incurred a
Termination of Service on the day following the expiration date of such
period. Notwithstanding the foregoing, the determination of whether a
Termination of Service has occurred with respect to an Incentive Stock
Option shall be made consistent with Code section 422.
ARTICLE III - ADMINISTRATION
3.1 This Plan shall be administered by the Committee. The Committee, in its
discretion, may delegate to one or more of its members such of its
powers as it deems appropriate. The Committee also may limit the power
of any member to the extent necessary to comply with rule 16b-3 under
the Act, Code section 162(m) or any other law or for any other purpose.
The Board may appoint originally, and as vacancies occur, the members of
the Committee who shall serve at the pleasure of the Board. The Board
may serve as the Committee if by the terms of the Plan all Board members
are otherwise eligible to serve on the Committee. To the extent that a
Committee has not otherwise been appointed, references to the
"Committee" herein shall mean the Board.
3.2 The Committee shall meet at such times and places as it determines. A
majority of its members shall constitute a quorum, and the decision of a
majority of those present at any meeting at which a quorum is present
shall constitute the decision of the Committee. A memorandum signed by
all of its members shall constitute the decision of the Committee
without necessity, in such event, for holding an actual meeting.
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3.3 The Committee shall have the exclusive right to interpret, construe and
administer the Plan, to select the persons who are eligible to receive
an Award, and to act in all matters pertaining to the granting of an
Award and the contents of the Agreement evidencing the Award, including
without limitation, the determination of the number of Stock Options or
shares of Stock subject to an Award and the form, terms, conditions and
duration of each Award, and any amendment thereof consistent with the
provisions of the Plan. All acts, determinations and decisions of the
Committee made or taken pursuant to grants of authority under the Plan
or with respect to any questions arising in connection with the
administration and interpretation of the Plan, including the
severability of any and all of the provisions thereof, shall be
conclusive, final and binding upon all Participants, Eligible
Participants and their estates and beneficiaries.
3.4 The Committee may adopt such rules, regulations and procedures of
general application for the administration of this Plan, as it deems
appropriate.
3.5 Subject to adjustment as provided in Section 3.10, the aggregate number
of shares of Stock which are available for issuance pursuant to Awards
granted under the Plan shall be Five Million (5,000,000) shares. Such
shares of Stock shall be made available from authorized and unissued
shares of Stock. If, for any reason, any shares of Stock awarded or
subject to purchase under the Plan are not delivered or purchased, or
are reacquired by the Company, for reasons including, but not limited
to, a forfeiture of Restricted Stock or termination, expiration or
cancellation of a Stock Option, such shares of Stock shall not be
charged against the aggregate number of shares of Stock available for
issuance pursuant to Awards granted under the Plan and shall again be
available for issuance pursuant to Awards granted under the Plan. If the
exercise price and/or withholding obligation under a Stock Option is
satisfied by tendering shares of Stock to the Company (either by actual
delivery or attestation), only the number of shares of Stock issued net
of the share of Stock so tendered shall be deemed delivered for purposes
of determining the maximum number of shares of Stock available for
issuance under the Plan.
3.6 Each Award granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to and incorporate, by
reference or otherwise, the applicable terms and conditions of the Plan,
and any other terms and conditions, not inconsistent with the Plan, as
may be imposed by the Committee.
3.7 The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to:
(a) the listing of such shares on any stock exchange or national
quotation system on which the Stock may then be listed; and
(b) the completion of any registration or qualification of such
shares of Stock under any federal or state law, or any ruling or
regulation of any government body which the Company shall, in
its discretion, determine to be necessary or advisable.
3.8 All certificates for shares of Stock delivered under the Plan shall also
be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock
exchange or national quotation system upon which the Stock is then
listed and any applicable federal or state laws, and the Committee may
cause a legend or legends to be
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placed on any such certificates to make appropriate reference to such
restrictions. In making such determination, the Committee may rely upon
an opinion of counsel for the Company.
3.9 Subject to the restrictions on Restricted Stock, as provided in Article
VII of the Plan and in the Restricted Stock Agreement, each Participant
who receives an Award of Restricted Stock shall have all of the rights
of a shareholder with respect to such shares of Stock, including the
right to vote the shares to the extent, if any, such shares possess
voting rights and receive dividends and other distributions. Except as
provided otherwise in the Plan or in an Agreement, no Participant
awarded a Stock Option shall have any right as a shareholder with
respect to any shares of Stock covered by his or her Stock Option prior
to the date of issuance to him or her of a certificate or certificates
for such shares of Stock.
3.10 If any reorganization, recapitalization, reclassification, stock split,
stock dividend, or consolidation of shares of Stock, merger or
consolidation or separation, including a spin-off, of the Company or
sale or other disposition by the Company of all or a portion of its
assets, any other change in the Company's corporate structure, or any
distribution to shareholders other than a cash dividend results in the
outstanding shares of Stock, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class
of shares of Stock or other securities of the Company, or for shares of
Stock or other securities of any other corporation; or new, different or
additional shares or other securities of the Company or of any other
corporation being received by the holders of outstanding shares of
Stock, then the Committee shall make equitable adjustments in:
(a) the limitation on the aggregate number of shares of Stock that
may be awarded as set forth in Section 3.5 of the Plan;
(b) the number of shares and class of Stock that may be subject to
an Award, and which have not been issued or transferred under an
outstanding Award;
(c) the purchase price to be paid per share of Stock under
outstanding Stock Options; and
(d) the terms, conditions or restrictions of any Award and
Agreement, including the price payable for the acquisition of
Stock;
provided, however, that all adjustments made as the result of the
foregoing in respect of each Incentive Stock Option shall be made so
that such Stock Option shall continue to be an incentive stock option
within the meaning of Code section 422, unless the Committee takes
affirmative action to treat such Stock Option instead as a Nonqualified
Stock Option.
3.11 In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee
shall be indemnified by the Company against reasonable expenses,
including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted thereunder, and against
all amounts paid by them in settlement thereof, provided such settlement
is approved by independent legal counsel selected by the Company, or
paid by them in satisfaction of a judgment or settlement in any such
action, suit or proceeding,
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except as to matters as to which the Committee member has been negligent
or engaged in misconduct in the performance of his duties; provided,
that within 60 days after institution of any such action, suit or
proceeding, a Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
3.12 The Committee may require each person purchasing shares of Stock
pursuant to a Stock Option or other Award under the Plan to represent to
and agree with the Company in writing that he is acquiring the shares of
Stock without a view to distribution thereof and/or that he has met such
other requirements as the Committee determines may be applicable to such
purchase. The certificates for such shares of Stock may include any
legend which the Committee deems appropriate to reflect any restrictions
on transfer.
3.13 The Committee shall be authorized to make adjustments in performance
based criteria or in the other terms and conditions of Awards in
recognition of unusual or nonrecurring events affecting the Company or
its financial statements or changes in applicable laws, regulations or
accounting principles. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Agreement in
the manner and to the extent it shall deem desirable to carry it into
effect. In the event the Company shall assume outstanding employee
benefit awards or the right or obligation to make such awards in the
future in connection with the acquisition of another corporation or
business entity, the Committee may, in its discretion, make such
adjustments in the terms of Awards under the Plan as it shall deem
appropriate to assume the outstanding awards, rights and obligations.
3.14 All outstanding Awards to any Participant may be canceled if:
(a) the Participant, without the consent of the Committee, while
employed by the Employer or after termination of such
employment, becomes associated with, employed by, renders
services to, or owns any interest in, other than any
insubstantial interest, as determined by the Committee, any
business that is in competition with the Employer or with any
business in which the Employer has a substantial interest or
that has a substantial interest in the Employer, as determined
by the Committee; or
(b) the Participant is terminated for cause as determined by the
Committee.
3.15 In connection with any Public Offering, a Participant shall not sell,
make any short sale of, loan, hypothecate, pledge, grant any option for
the purchase of, or otherwise dispose or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to,
any Stock acquired under the Plan without the prior written consent of
the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after
the effective date of the final prospectus for the Public Offering as
may be requested by the Company or such underwriters. In no event,
however, shall such period exceed the period for which securities owned
by the Chief Executive Officer of the Company are subject to the same
restrictions. Any new, substituted or additional securities that are by
reason of any recapitalization or reorganization distributed with
respect to Stock acquired under the Plan shall be immediately subject to
the Market Stand-Off, to the same extent the Stock acquired under the
Plan is at such time covered by such provisions. In order to enforce the
Market Stand-Off, the Company may impose stop-transfer restrictions with
respect to the Stock acquired under the Plan until the end of the
applicable stand-off period.
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ARTICLE IV - INCENTIVE STOCK OPTIONS
4.1 Each provision of this Article IV and of each Incentive Stock Option granted under the Plan shall be construed in accordance with the provisions of Code section 422, and any provision hereof that cannot be so construed shall be disregarded.
4.2 All or any portion of the shares of stock authorized for issuance pursuant to Section 3.5 herein shall be available for issuance pursuant to Incentive Stock Options granted under the Plan.
4.3 Incentive Stock Options shall be granted only to Eligible Participants who are in the active employment of the Employer, each of whom may be granted one or more such Incentive Stock Options for a reason related to his employment at such time or times determined by the Committee following the Effective Date through the date which is ten (10) years following the Effective Date, subject to the following conditions:
(a) The Incentive Stock Option exercise price per share of Stock
shall be set in the corresponding Agreement, but shall not be
less than 100% of the Fair Market Value of the Stock on the
Option Grant Date. However, if the Eligible Participant owns
more than 10% of the outstanding capital stock of the Company
(as determined pursuant to Code sections 422(b)(6) and 424(d))
on the Option Grant Date, the Incentive Stock Option price per
share shall not be less than 110% of the Fair Market Value of
the Stock on the Option Grant Date.
(b) The Incentive Stock Option may be exercised in whole or in part within ten (10) years from the Option Grant Date (five (5) years if the Eligible Participant owns more than 10% of the outstanding capital stock of the Company (as determined pursuant to Code Sections 422(b)(6) and 424(d) on the Option Grant Date), or such shorter period as may be specified by the Committee in the Agreement.
(c) The Committee may adopt any other terms and conditions which it determines should be imposed for the Incentive Stock Option to qualify under Code section 422, as well as any other terms and conditions not inconsistent with this Article IV as determined by the Committee.
4.4 The Incentive Stock Option Agreement may include any other terms and conditions not inconsistent with this Article IV or in Article VI, as determined by the Committee.
4.5 To the extent the aggregate Fair Market Value, determined as of the Option Grant Date, of the shares of Stock with respect to which incentive stock options (determined without regard to this subsection) are first exercisable during any calendar year (under this Plan or any other plan of the Company and its parent and subsidiary corporations (within the meaning of Code sections 424(e) and (f)) by any Participant exceeds $100,000, such Incentive Stock Options granted under the Plan shall be treated as Nonqualified Stock Options granted under Article V to the extent of such excess.
4.6 Any Incentive Stock Option that fails to qualify as such under Code section 422 shall be treated as a Nonqualified Stock Option.
ARTICLE V - NONQUALIFIED STOCK OPTIONS
5.1 Nonqualified Stock Options may be granted to Eligible Participants to purchase shares of Stock at such time or times determined by the Committee, subject to the terms and conditions set forth in this Article V.
5.2 The Nonqualified Stock Option exercise price per share of Stock shall be established in the Agreement and may be more than, equal to or less than 100% of the Fair Market Value at the time of the grant, but may not be less than the par value of the Stock.
5.3 A Nonqualified Stock Option may be exercised in full or in part from time to time within such period as may be specified by the Committee in the corresponding Agreement; provided, that, in any event, the Nonqualified Stock Option shall lapse and cease to be exercisable upon a Termination of Service or within such period following a Termination of Service as shall have been specified in the Nonqualified Stock Option Agreement; provided, that such period following a Termination of Service shall in no event extend the original exercise period of the Nonqualified Stock Option.
5.4 The Nonqualified Stock Option Agreement may include any other terms and conditions not inconsistent with this Article V or in Article VI, as determined by the Committee.
ARTICLE VI - INCIDENTS OF STOCK OPTIONS
6.1 Each Stock Option shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option and any provisions that may be advisable to comply with applicable laws, regulations or rulings of any governmental authority.
6.2 Except as provided below, a Stock Option shall not be transferable by the Participant other than by will or by the laws of descent and distribution or, to the extent otherwise allowed by applicable law, pursuant to a qualified domestic relations order as defined by the Code or the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, and shall be exercisable during the lifetime of the Participant only by him or in the event of his death or Disability, by his guardian or legal representative. However, a Nonqualified Stock Option may be transferred and exercised by the transferee to the extent permitted by the Committee and to the extent determined by the Committee to be consistent with securities and other applicable laws, rules and regulations and with Company policy.
6.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid for at the time of exercise (or, in case of an exercise pursuant to a cashless exercise mechanism described below, as soon as practicable after such exercise) in cash or by tendering (either by actual delivery or by attestation) shares of Stock held by the Participant for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes, as determined by the Committee in its discretion, and valued as of the exercise date or in any combination thereof in such amounts, at such times and upon such terms as shall be determined by the Committee, subject to limitations set forth in the corresponding Stock Option Agreement. The Committee may establish a cashless exercise mechanism by which a Participant may pay the exercise price under a Stock Option by irrevocably authorizing a
third party to sell shares of Stock (or a sufficient portion of the
shares) acquired upon exercise of the Stock Option and remit to the
Company a sufficient portion of the sales proceeds to pay the entire
exercise price and/or any tax withholding resulting from such exercise.
Notwithstanding anything in the Plan or the applicable Agreement to the
contrary, with respect to any Participant who is subject to the
provisions of Section 16 of the Exchange Act, cashless exercises shall
only be permitted to the extent that they may be made in compliance with
Section 16 and Rule 16b-3 thereunder.
6.4 If a Stock Option Agreement so provides, the Committee may require that all or part of the shares of Stock to be issued upon the exercise of a Stock Option shall take the form of Restricted Stock, which shall be valued on the date of exercise, as determined by the Committee, on the basis of Fair Market Value of such Restricted Stock determined without regard to the forfeiture restrictions involved.
6.5 No cash dividends shall be paid on shares of Stock subject to unexercised Stock Options. The Committee may provide, however, that a Participant to whom a Stock Option has been granted which is exercisable in whole or in part at a future time for shares of Stock shall be entitled to receive an amount per share equal in value to the cash dividends, if any, paid per share on issued and outstanding Stock, as of the dividend record dates occurring during the period between the date of the grant and the time each such share of Stock is delivered pursuant to exercise of such Stock Option. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be:
(a) paid in cash or Stock either from time to time prior to, or at the time of the delivery of, such Stock, or upon expiration of the Stock Option if it shall not have been fully exercised; or
(b) converted into contingently credited shares of Stock, with respect to which dividend equivalents may accrue, in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee.
Such Stock, whether delivered or contingently credited, shall be charged against the limitations set forth in Plan Section 3.5.
6.6 The Committee, in its sole discretion, may authorize payment of interest equivalents on dividend equivalents which are payable in cash at a future time.
6.7 If a Participant is required to pay to the Employer an amount with respect to income and employment tax withholding obligations in connection with exercise of a Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, in its discretion and subject to such rules as it may adopt, may permit the Participant to satisfy the obligation, in whole or in part, by surrendering shares of Stock which the Participant already owns or by making an irrevocable election that, in lieu of the issuance of Stock, a portion of the total Fair Market Value of the shares of Stock subject to the Stock Option and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, be surrendered for cash and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction.
6.8 The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at such price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Stock previously subject to them shall be available for the grant of other Stock Options.
6.9 The Committee may provide in any Stock Option Agreement entered into pursuant to the Plan, or by separate agreement, that if a Participant makes payment upon the exercise of any Stock Option granted under this Plan in whole or in part through the surrender of shares of Stock, such Participant shall automatically receive a new Stock Option for the number of shares of Stock so surrendered by him at a price equal to the Fair Market Value of the shares of Stock at the time of surrender, exercisable on the same basis and having the same terms as the underlying Stock Option or on such other basis as the Committee shall determine and provide in the Stock Option Agreement.
ARTICLE VII - RESTRICTED STOCK
7.1 Restricted Stock Awards may be made to Participants as incentives for the performance of future services that will contribute materially to the successful operation of the Employer. Awards of Restricted Stock may be made either alone or in addition to or in tandem with other Awards granted under the Plan.
7.2 With respect to Awards of Restricted Stock, the Committee shall:
(a) determine the purchase price, if any, to be paid for such Restricted Stock, which may be more than, equal to or less than par value and may be zero, subject to such minimum consideration as may be required by applicable law;
(b) determine the length of the Restriction Period;
(c) determine any restrictions applicable to the Restricted Stock such as service or performance;
(d) determine if the restrictions shall lapse as to all shares of Restricted Stock at the end of the Restriction Period or as to a portion of the shares of Restricted Stock in installments during the Restriction Period; and
(e) determine if dividends and other distributions on the Restricted Stock are to be paid currently to the Participant or paid to the Company for the account of the Participant.
7.3 Awards of Restricted Stock must be accepted within a period of 60 days, or such other period as the Committee may specify, by executing a Restricted Stock Agreement and paying whatever price, if any, is required. The prospective recipient of a Restricted Stock Award shall not have any rights with respect to such Award, unless such recipient
has executed a Restricted Stock Agreement, has delivered a fully executed copy thereof to the Committee, and has otherwise complied with the applicable terms and conditions of such Award.
7.4 Except when the Committee determines otherwise, or as otherwise provided in the Restricted Stock Agreement, if a Participant terminates employment with the Employer for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and shall be reacquired by the Company.
7.5 Except as otherwise provided in this Article VII, or as otherwise provided in the Restricted Stock Agreement, no shares of Restricted Stock received by a Participant shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period.
7.6 To the extent not otherwise provided in a Restricted Stock Agreement, in cases of death, Disability or Retirement or in cases of special circumstances, the Committee may in its discretion elect to waive any or all remaining restrictions with respect to such Participant's Restricted Stock.
7.7 In the event of hardship or other special circumstances of a Participant whose employment with the Employer is involuntarily terminated, the Committee may in its discretion elect to waive in whole or in part any or all remaining restrictions with respect to any or all of the Participant's Restricted Stock, based on such factors and criteria as the Committee may deem appropriate.
7.8 Upon an Award of Restricted Stock to a Participant, one or more stock certificates representing the shares of Restricted Stock shall be registered in the Participant's name. Such certificates may either:
(a) be held in custody by the Company until the Restriction Period expires or until restrictions thereon otherwise lapse, and the Participant shall deliver to the Company one or more stock powers endorsed in blank relating to the Restricted Stock; and/or
(b) be issued to the Participant and registered in the name of the Participant, and shall bear an appropriate restrictive legend and shall be subject to appropriate stop-transfer orders.
7.9 Except as provided in this Article VII or in the applicable Restricted Stock Agreement, a Participant receiving a Restricted Stock Award shall have, with respect to such Restricted Stock Award, all of the rights of a shareholder of the Company, including the right to vote the shares to the extent, if any, such shares possess voting rights and the right to receive any dividends; provided, however, the Committee may require that any dividends on such shares of Restricted Stock shall be automatically deferred and reinvested in additional Restricted Stock subject to the same restrictions as the underlying Award, or may require that dividends and other distributions on Restricted Stock shall be paid to the Company for the account of the Participant. The Committee shall determine whether interest shall be paid on such amounts, the rate of any such interest, and the other terms applicable to such amounts.
7.10 If and when the Restriction Period expires without a prior forfeiture of
the Restricted Stock subject to such Restriction Period, unrestricted
certificates for such shares shall be delivered to the Participant;
provided, however, that the Committee may cause such legend or legends
to be placed on any such certificates as it may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission and any applicable federal or state law.
7.11 In order to better ensure that Award payments actually reflect the
performance of the Company and the service of the Participant, the
Committee may provide, in its sole discretion, for a tandem
performance-based or other Award designed to guarantee a minimum value,
payable in cash or Stock to the recipient of a Restricted Stock Award,
subject to such performance, future service, deferral and other terms
and conditions as may be specified by the Committee.
ARTICLE VIII - STOCK AWARDS
8.1 A Stock Award shall be granted only in payment of compensation that has
been earned or as compensation to be earned, including without
limitation, compensation awarded concurrently with or prior to the grant
of the Stock Award.
8.2 For the purposes of this Plan, in determining the value of a Stock
Award, all shares of Stock subject to such Stock Award shall be valued
at not less than 100% of the Fair Market Value of such shares of Stock
on the date such Stock Award is granted, regardless of whether or when
such shares of Stock are issued or transferred to the Participant and
whether or not such shares of Stock are subject to restrictions which
affect their value.
8.3 Shares of Stock subject to a Stock Award may be issued or transferred to
the Participant at the time the Stock Award is granted, or at any time
subsequent thereto, or in installments from time to time, as the
Committee shall determine. If any such issuance or transfer shall not be
made to the Participant at the time the Stock Award is granted, the
Committee may provide for payment to such Participant, either in cash or
shares of Stock, from time to time or at the time or times such shares
of Stock shall be issued or transferred to such Participant, of amounts
not exceeding the dividends which would have been payable to such
Participant in respect of such shares of Stock, as adjusted under
Section 3.10, if such shares of Stock had been issued or transferred to
such Participant at the time such Stock Award was granted.
8.4 A Stock Award shall be subject to such terms and conditions, including
without limitation, restrictions on the sale or other disposition of the
Stock Award or of the shares of Stock issued or transferred pursuant to
such Stock Award, as the Committee shall determine; provided, however,
that upon the issuance or transfer of shares pursuant to a Stock Award,
the Participant, with respect to such shares of Stock, shall be and
become a shareholder of the Company fully entitled to receive dividends,
to vote to the extent, if any, such shares possess voting rights and to
exercise all other rights of a shareholder except to the extent
otherwise provided in the Stock Award. Each Stock Award shall be
evidenced by a written Agreement in such form as the Committee shall
determine.
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ARTICLE IX - AMENDMENT AND TERMINATION
9.1 The Board, at any time and from time to time, may amend or terminate the Plan (including, but not limited, to amendments which the Board deems appropriate to enhance the Company's ability to claim deductions related to Stock Option exercises or to comply with applicable financial reporting guidelines). To the extent required by Code section 422 and/or the rules of the exchange upon which the Stock is traded, no amendment, without approval by the Company's shareholders, shall:
(a) alter the group of persons eligible to participate in the Plan;
(b) except as provided in Plan Section 3.10, increase the maximum number of shares of Stock which are available for issuance pursuant to Awards granted under the Plan;
(c) extend the period during which Incentive Stock Options may be granted beyond the date which is ten (10) years following the Effective Date;
(d) limit or restrict the powers of the Committee with respect to the administration of this Plan;
(e) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option;
(f) materially increase the benefits accruing to Participants under this Plan; or
(g) change any of the provisions of this Article IX.
9.2 The Committee shall be entitled to create, amend or delete appendices to this Plan as specified herein.
9.3 No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Company shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Award previously granted to such Participant under this Plan; provided, however, the Committee retains the right and power to treat any outstanding Incentive Stock Option as a Nonqualified Stock Option as provided herein.
9.4 Notwithstanding anything herein to the contrary, if the right to receive or benefit from any Award, either alone or together with payments that a Participant has the right to receive from the Employer, would constitute a "parachute payment" under Code section 280G, all such payments may be reduced, in the discretion of the Committee, to the largest amount that
will avoid an excise tax to the Participant under Code section 280G.
ARTICLE X - MISCELLANEOUS PROVISIONS
10.1 Nothing in the Plan or any Award granted under the Plan shall confer
upon any Participant any right to continue in the employ of the
Employer, or to serve as a director or consultant thereof, or interfere
in any way with the right of the Employer to terminate his or her
employment or relationship at any time. Unless otherwise agreed to by
the Board, no
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Award granted under the Plan shall be deemed salary or compensation for
the purpose of computing benefits under any employee benefit plan or
other arrangement of the Employer for the benefit of its employees
unless the Employer shall determine otherwise. No Participant shall have
any claim to an Award until it is actually granted under the Plan. To
the extent that any person acquires a right to receive payments from the
Company under the Plan, such right shall, except as otherwise provided
by the Committee, be no greater than the right of an unsecured general
creditor of the Company. All payments to be made under the Plan shall be
paid from the general funds of the Company, and no special or separate
fund shall be established and no segregation of assets shall be made to
assure payment of such amounts, except as provided in Article VII with
respect to Restricted Stock and except as otherwise provided by the
Committee.
10.2 The Committee or the Company may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of any
taxes which the Employer is required by any law or regulation of any
governmental authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Award or the exercise
thereof, including, but not limited to, withholding the payment of all
or any portion of such Award or another Award under this Plan until the
Participant reimburses the Employer for the amount the Employer is
required to withhold with respect to such taxes, or canceling any
portion of such Award or another Award under this Plan in an amount
sufficient to reimburse itself for the amount it is required to so
withhold, or selling any property contingently credited by the Employer
for the purpose of paying such Award or another Award under this Plan,
in order to withhold or reimburse itself for the amount it is required
to so withhold. The amount withheld shall not exceed the statutory
minimum federal and state income and employment tax liability arising
from the exercise transaction.
10.3 The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by
any United States government or regulatory agency as may be required.
10.4 The terms of the Plan shall be binding upon the Employer, and its
successors and assigns.
10.5 The Plan is intended to constitute an "UNFUNDED" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor
of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver shares of Stock or payments in lieu of or with
respect to Awards under the Plan; provided, however, that, unless the
Committee otherwise determines with the consent of the affected
Participant, the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.
10.6 Each Participant being granted a Restricted Stock Award or exercising
any other Award under the Plan agrees to give the Committee prompt
written notice of any election made by such Participant under Code
section 83(b), or any similar provision thereof.
10.7 If any provision of this Plan or an Agreement is or becomes or is deemed
invalid, illegal or unenforceable in any jurisdiction, or would
disqualify the Plan or any Agreement under any law deemed applicable by
the Committee, such provision shall be construed or deemed amended to
conform to applicable laws or if it cannot be construed or deemed
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amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Agreement, it shall be stricken
and the remainder of the Plan or the Agreement shall remain in full
force and effect.
10.8 The Committee may incorporate additional or alternative provisions for
this Plan with respect to residents of one or more individual states to
the extent necessary or desirable under state securities laws. Such
provisions shall be set out in one or more appendices hereto which may
be amended or deleted by the Committee from time to time.
10.9 By accepting any Award, Participant agrees to execute and deliver such
lock-up or other agreements restricting the ability of Participant to
sell the Shares or other securities of the Company requested by the
Company any underwriter, placement agent or investment banker in
connection with any public or private offer or sale of securities by the
Company. The Company may impose stock transfer restrictions to enforce
this provision whether or not Participant signs such an agreement.
10.10 By accepting any Award, Participant hereby agrees to comply with any
plan, policy or other document of the Company approved by the Board of
Directors of the Company to ensure compliance with securities laws,
rules and regulations both during the term of employment of Participant
and for one (1) year thereafter. The Company may impose stop-transfer
restrictions to enforce this provision.
IN WITNESS WHEREOF, this document is executed effective as of the date
specified above.
SMART ONLINE, INC.
(CORPORATE SEAL)
By: /s/ D. Michael Nouri
--------------------------------
D. Michael Nouri, President
ATTEST:
/s/ Ronna Loprete
--------------------------------
Ronna Loprete, Secretary
|
SMART ONLINE, INC.
2001 EQUITY COMPENSATION PLAN
Effective as of May 31, 2001
SMART ONLINE, INC.
2001 EQUITY COMPENSATION PLAN
ARTICLE I - GENERAL PROVISIONS
1.1 The Plan is designed, for the benefit of the Company, to attract and retain for the Company personnel of exceptional ability; to motivate such personnel through added incentives to make a maximum contribution to greater profitability; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to equity compensation.
1.2 Awards under the Plan may be made to Participants in the form of (i) Incentive Stock Options, (ii) Nonqualified Stock Options; (iii) Restricted Stock, and/or (iv) Stock Awards.
1.3 The Plan shall be effective May 31, 2001 (the "Effective Date").
ARTICLE II - DEFINITIONS
Except where the context otherwise indicates, the following definitions apply:
2.1 "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered.
2.2 "Agreement" means the written agreement evidencing each Award granted to a Participant under the Plan.
2.3 "Award" means an award granted to a Participant of a Stock Option or Restricted Stock or a Stock Award or any combination thereof.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.
2.6 "Committee" means the committee consisting of one or more members of the Board as may be appointed by the Board to administer this Plan pursuant to Article III or for such limited purposes as may be provided by the Board. In the event the Board does not appoint such committee, all references to the "Committee" herein shall mean the Board.
2.7 "Company" means Smart Online, Inc., a Delaware corporation, and its
successors and assigns.
2.8 "Disability," with respect to any Incentive Stock Option, means
disability as determined under Code section 22(e)(3), and with respect
to any other Award, means (i) with respect to a Participant who is
eligible to participate in the Employer's program of long-term
disability insurance, if any, a condition with respect to which the
Participant is entitled to commence benefits under such program of
long-term disability insurance, or (ii) with respect to any Participant
(including a Participant who is eligible to participate in the
Employer's program of long-term disability insurance, if any), a
disability as determined under procedures established by the Committee
or in any Award.
2.9 "Eligible Participant" means an employee of the Employer (including an
officer), as shall be determined by the Committee, as well as any other
person, including a non-employee member of the Board or a consultant who
provides or has provided services to the Employer, subject to
limitations as may be provided by the Code, the Act or the Committee, as
shall be determined by the Committee.
2.10 "Employer" means the Company and its parent and subsidiary corporations
(within the meaning of Code sections 424(e) and (f)) during any relevant
period. With respect to all purposes of the Plan, including, but not
limited to, the establishment, amendment, termination, operation and
administration of the Plan, the Company shall be authorized to act on
behalf of all other entities included within the definition of
"Employer."
2.11 "Fair Market Value" means the value of a share of Stock, as determined
in good faith by the Committee; provided, however, that
(a) if the Stock is listed on a national securities exchange, Fair
Market Value on a date shall be the closing sale price reported
for the Stock on such exchange on such date if at least 100
shares of Stock were sold on such date or, if fewer than 100
shares of stock were sold on such date, then Fair Market Value
on such date shall be the closing sale price reported for the
Stock on such exchange on the last prior date on which at least
100 shares were sold, all as reported in THE WALL STREET JOURNAL
or such other source as the Committee deems reliable; and
(b) if the Stock is not listed on a national securities exchange but
is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System or other
comparable quotation system, Fair Market Value on a date shall
be the last sale price reported for the Stock on such system on
such date if at least 100 shares of Stock were sold on such date
or, if fewer than 100 shares of Stock were sold on such date,
then Fair Market Value on such date shall be the average of the
high bid and low asked prices reported for the Stock on such
system on such date or, if no shares of Stock were sold on such
date, then Fair Market Value on such date shall be the last sale
2
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price reported for the Stock on such system on the last date on
which at least 100 shares of Stock were sold, all as reported in
THE WALL STREET JOURNAL or such other source as the Committee
deems reliable; and
(c) If the Stock is not traded on a national securities exchange or
reported by a national quotation system, if any broker-dealer
makes a market for the Stock, then the Fair Market Value of the
Stock on a date shall be the average of the highest and lowest
quoted selling prices of the Stock in such market on such date
if at least 100 shares of Stock were sold on such date or, if
fewer than 100 shares of Stock were sold on such date, then Fair
Market Value on such date shall be the average of the high bid
and low asked prices for the Stock in such market on such date
or, if no prices are quoted on such date, then Fair Market Value
on such date shall be the average of the highest and lowest
quoted selling prices of the Stock in such market on the last
date on which at least 100 shares of Stock were sold.
The Committee shall determine Fair Market Value in connection with an
Incentive Stock Option in accordance with Code section 422 and the rules
and regulations thereunder.
2.12 "Incentive Stock Option" means a Stock Option granted to an Eligible
Participant under Article IV of the Plan.
2.13 "Nonqualified Stock Option" means a Stock Option granted to an Eligible
Participant under Article V of the Plan.
2.14 "Option Grant Date" means, as to any Stock Option, the latest of:
(a) the date on which the Committee takes action to grant the Stock
Option to the Participant;
(b) the date the Participant receiving the Stock Option becomes an
employee of the Employer, to the extent employment status is a
condition of the grant or a requirement of the Code or the Act;
or
(c) such other date (later than the dates described in (a) and (b)
above) as the Committee may designate.
2.15 "Participant" means an Eligible Participant to whom an Award has been
granted and who has entered into an Agreement evidencing the Award.
2.16 "Plan" means the Smart Online, Inc. 2001 Equity Compensation Plan, as
amended from time to time.
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2.17 "Public Offering" means any underwritten public offering by the Company
of its equity securities pursuant to an effective registration statement
filed under the Securities Act of 1933, including the Company's initial
public offering.
2.18 "Restricted Stock" means an Award of Stock under Article VII of the
Plan, which Stock is issued with such restriction(s) as the Committee,
in its sole discretion, may impose, including without limitation, any
restriction on the right to sell, transfer, pledge or assign such Stock,
to vote such Stock, and/or to receive any cash dividends with respect to
such Stock, which restrictions may lapse separately or in combination at
such time or times, in installments or otherwise, as the Committee may
deem appropriate.
2.19 "Restriction Period" means the period commencing on the date an Award of
Restricted Stock is granted and ending on such date as the Committee
shall determine.
2.20 "Retirement" means retirement from active employment with the Employer,
as determined by the Committee.
2.21 "Stock" means shares of common stock of the Company as may be adjusted
pursuant to the provisions of Section 3.10.
2.22 "Stock Award" means an Award of Stock granted as payment of
compensation, as provided in Article VIII of the Plan.
2.23 "Stock Option" means an Incentive Stock Option granted under Article IV
or a Nonqualified Stock Option granted under Article V herein. A Stock
Option granted under the Plan shall be designated as either an Incentive
Stock Option or a Nonqualified Stock Option and, in the absence of such
designation, shall be treated as a Nonqualified Stock Option.
2.24 "Termination of Service" means, with respect to a Participant, the
discontinuance of the Participant's service relationship with the
Employer, including but not limited to service as an employee of the
Employer, as a non-employee member of the board of directors of any
entity constituting the Employer, as an independent contractor
performing services for the Employer, or as a consultant to the
Employer. Except to the extent provided otherwise in an Agreement or
determined otherwise by the Committee, a Termination of Service shall
not be deemed to have occurred if the capacity in which the Participant
provides service to the Employer changes (for example, a change from
consultant status to employee status) or if the Participant transfers
among the various entities constituting the Employer, so long as there
is no interruption in the provision of service by the Participant to the
Employer. The determination of whether a Participant has incurred a
Termination of Service shall be made by the Committee in its discretion.
A Participant shall not be deemed to have incurred a Termination of
Service if the Participant is on military leave, sick leave, or other
bona fide leave of absence approved by the Employer of 90 days or fewer
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(or any longer period during which the Participant is guaranteed
reemployment by statute or contract.) In the event a Participant's leave
of absence exceeds this period, he will be deemed to have incurred a
Termination of Service on the day following the expiration date of such
period. Notwithstanding the foregoing, the determination of whether a
Termination of Service has occurred with respect to an Incentive Stock
Option shall be made consistent with Code section 422.
ARTICLE III - ADMINISTRATION
3.1 This Plan shall be administered by the Committee. The Committee, in its
discretion, may delegate to one or more of its members such of its
powers as it deems appropriate. The Committee also may limit the power
of any member to the extent necessary to comply with rule 16b-3 under
the Act, Code section 162(m) or any other law or for any other purpose.
The Board may appoint originally, and as vacancies occur, the members of
the Committee who shall serve at the pleasure of the Board. The Board
may serve as the Committee if by the terms of the Plan all Board members
are otherwise eligible to serve on the Committee. To the extent that a
Committee has not otherwise been appointed, references to the
"Committee" herein shall mean the Board.
3.2 The Committee shall meet at such times and places as it determines. A
majority of its members shall constitute a quorum, and the decision of a
majority of those present at any meeting at which a quorum is present
shall constitute the decision of the Committee. A memorandum signed by
all of its members shall constitute the decision of the Committee
without necessity, in such event, for holding an actual meeting.
3.3 The Committee shall have the exclusive right to interpret, construe and
administer the Plan, to select the persons who are eligible to receive
an Award, and to act in all matters pertaining to the granting of an
Award and the contents of the Agreement evidencing the Award, including
without limitation, the determination of the number of Stock Options or
shares of Stock subject to an Award and the form, terms, conditions and
duration of each Award, and any amendment thereof consistent with the
provisions of the Plan. All acts, determinations and decisions of the
Committee made or taken pursuant to grants of authority under the Plan
or with respect to any questions arising in connection with the
administration and interpretation of the Plan, including the
severability of any and all of the provisions thereof, shall be
conclusive, final and binding upon all Participants, Eligible
Participants and their estates and beneficiaries.
3.4 The Committee may adopt such rules, regulations and procedures of
general application for the administration of this Plan, as it deems
appropriate.
3.5 Subject to adjustment as provided in Section 3.10, the aggregate number
of shares of Stock which are available for issuance pursuant to Awards
granted under the Plan
5
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shall be THREE MILLION (3,000,000) shares. Such shares of Stock shall be
made available from authorized and unissued shares of Stock. If, for any
reason, any shares of Stock awarded or subject to purchase under the
Plan are not delivered or purchased, or are reacquired by the Company,
for reasons including, but not limited to, a forfeiture of Restricted
Stock or termination, expiration or cancellation of a Stock Option, such
shares of Stock shall not be charged against the aggregate number of
shares of Stock available for issuance pursuant to Awards granted under
the Plan and shall again be available for issuance pursuant to Awards
granted under the Plan. If the exercise price and/or withholding
obligation under a Stock Option is satisfied by tendering shares of
Stock to the Company (either by actual delivery or attestation), only
the number of shares of Stock issued net of the share of Stock so
tendered shall be deemed delivered for purposes of determining the
maximum number of shares of Stock available for issuance under the Plan.
3.6 Each Award granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to and incorporate, by
reference or otherwise, the applicable terms and conditions of the Plan,
and any other terms and conditions, not inconsistent with the Plan, as
may be imposed by the Committee.
3.7 The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to:
(a) the listing of such shares on any stock exchange or national
quotation system on which the Stock may then be listed; and
(b) the completion of any registration or qualification of such
shares of Stock under any federal or state law, or any ruling or
regulation of any government body which the Company shall, in
its discretion, determine to be necessary or advisable.
3.8 All certificates for shares of Stock delivered under the Plan shall also
be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock
exchange or national quotation system upon which the Stock is then
listed and any applicable federal or state laws, and the Committee may
cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
3.9 Subject to the restrictions on Restricted Stock, as provided in Article
VII of the Plan and in the Restricted Stock Agreement, each Participant
who receives an Award of Restricted Stock shall have all of the rights
of a shareholder with respect to such shares of Stock, including the
right to vote the shares to the extent, if any, such shares possess
voting rights and receive dividends and other distributions. Except as
provided otherwise in the Plan or in an Agreement, no Participant
awarded a Stock
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Option shall have any right as a shareholder with respect to any shares
of Stock covered by his or her Stock Option prior to the date of
issuance to him or her of a certificate or certificates for such shares
of Stock.
3.10 If any reorganization, recapitalization, reclassification, stock split,
stock dividend, or consolidation of shares of Stock, merger or
consolidation or separation, including a spin-off, of the Company or
sale or other disposition by the Company of all or a portion of its
assets, any other change in the Company's corporate structure, or any
distribution to shareholders other than a cash dividend results in the
outstanding shares of Stock, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class
of shares of Stock or other securities of the Company, or for shares of
Stock or other securities of any other corporation; or new, different or
additional shares or other securities of the Company or of any other
corporation being received by the holders of outstanding shares of
Stock, then the Committee shall make equitable adjustments in:
(a) the limitation on the aggregate number of shares of Stock that
may be awarded as set forth in Section 3.5 of the Plan;
(b) the number of shares and class of Stock that may be subject to
an Award, and which have not been issued or transferred under an
outstanding Award;
(c) the purchase price to be paid per share of Stock under
outstanding Stock Options; and
(d) the terms, conditions or restrictions of any Award and
Agreement, including the price payable for the acquisition of
Stock;
provided, however, that all adjustments made as the result of the
foregoing in respect of each Incentive Stock Option shall be made so
that such Stock Option shall continue to be an incentive stock option
within the meaning of Code section 422, unless the Committee takes
affirmative action to treat such Stock Option instead as a Nonqualified
Stock Option.
3.11 In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee
shall be indemnified by the Company against reasonable expenses,
including attorney's fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted thereunder, and against
all amounts paid by them in settlement thereof, provided such settlement
is approved by independent legal counsel selected by the Company, or
paid by them in satisfaction of a judgment or settlement in any such
action, suit or proceeding, except as to matters as to which the
Committee member has been negligent or engaged in misconduct in the
performance of his
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duties; provided, that within 60 days after institution of any such
action, suit or proceeding, a Committee member shall in writing offer
the Company the opportunity, at its own expense, to handle and defend
the same.
3.12 The Committee may require each person purchasing shares of Stock
pursuant to a Stock Option or other Award under the Plan to represent to
and agree with the Company in writing that he is acquiring the shares of
Stock without a view to distribution thereof and/or that he has met such
other requirements as the Committee determines may be applicable to such
purchase. The certificates for such shares of Stock may include any
legend, which the Committee deems appropriate to reflect any
restrictions on transfer.
3.13 The Committee shall be authorized to make adjustments in performance
based criteria or in the other terms and conditions of Awards in
recognition of unusual or nonrecurring events affecting the Company or
its financial statements or changes in applicable laws, regulations or
accounting principles. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Agreement in
the manner and to the extent it shall deem desirable to carry it into
effect. In the event the Company shall assume outstanding employee
benefit awards or the right or obligation to make such awards in the
future in connection with the acquisition of another corporation or
business entity, the Committee may, in its discretion, make such
adjustments in the terms of Awards under the Plan as it shall deem
appropriate to assume the outstanding awards, rights and obligations.
3.14 All outstanding Awards to any Participant may be canceled if:
(a) the Participant, without the consent of the Committee, while
employed by the Employer or after termination of such
employment, becomes associated with, employed by, renders
services to, or owns any interest in, other than any
insubstantial interest, as determined by the Committee, any
business that is in competition with the Employer or with any
business in which the Employer has a substantial interest or
that has a substantial interest in the Employer, as determined
by the Committee; or
(b) the Participant is terminated for cause as determined by the
Committee.
3.15 In connection with any Public Offering, a Participant shall not sell,
make any short sale of, loan, hypothecate, pledge, grant any option for
the purchase of, or otherwise dispose or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to,
any Stock acquired under the Plan without the prior written consent of
the Company or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after
the effective date of the final prospectus for the Public Offering as
may be requested by the Company or such underwriters. In no event,
however, shall such period exceed the period for which securities owned
by the Chief Executive Officer of the Company are subject to
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the same restrictions. Any new, substituted or additional securities
that are by reason of any recapitalization or reorganization distributed
with respect to Stock acquired under the Plan shall be immediately
subject to the Market Stand-Off, to the same extent the Stock acquired
under the Plan is at such time covered by such provisions. In order to
enforce the Market Stand-Off, the Company may impose stop-transfer
restrictions with respect to the Stock acquired under the Plan until the
end of the applicable stand-off period.
ARTICLE IV - INCENTIVE STOCK OPTIONS
4.1 Each provision of this Article IV and of each Incentive Stock Option
granted under the Plan shall be construed in accordance with the
provisions of Code section 422, and any provision hereof that cannot be
so construed shall be disregarded.
4.2 All or any portion of the shares of stock authorized for issuance
pursuant to Section 3.5 herein shall be available for issuance pursuant
to Incentive Stock Options granted under the Plan.
4.3 Incentive Stock Options shall be granted only to Eligible Participants
who are in the active employment of the Employer, each of whom may be
granted one or more such Incentive Stock Options for a reason related to
his employment at such time or times determined by the Committee
following the Effective Date through the date which is ten (10) years
following the Effective Date, subject to the following conditions:
(a) The Incentive Stock Option exercise price per share of Stock
shall be set in the corresponding Agreement, but shall not be
less than 100% of the Fair Market Value of the Stock on the
Option Grant Date. However, if the Eligible Participant owns
more than 10% of the outstanding Stock (as determined pursuant
to Code section 424(d)) on the Option Grant Date, the Incentive
Stock Option price per share shall not be less than 110% of the
Fair Market Value of the Stock on the Option Grant Date.
(b) The Incentive Stock Option may be exercised in whole or in part
within ten (10) years from the Option Grant Date (five (5) years
if the Eligible Participant owns more than 10% of the Stock on
the Option Grant Date), or such shorter period as may be
specified by the Committee in the Agreement.
(c) The Committee may adopt any other terms and conditions which it
determines should be imposed for the Incentive Stock Option to
qualify under Code section 422, as well as any other terms and
conditions not inconsistent with this Article IV as determined
by the Committee.
4.4 The Incentive Stock Option Agreement may include any other terms and
conditions not inconsistent with this Article IV or in Article VI, as
determined by the Committee.
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4.5 To the extent the aggregate Fair Market Value, determined as of the
Option Grant Date, of the shares of Stock with respect to which
incentive stock options (determined without regard to this subsection)
are first exercisable during any calendar year (under this Plan or any
other plan of the Company and its parent and subsidiary corporations
(within the meaning of Code sections 424(e) and (f)) by any Participant
exceeds $100,000, such Incentive Stock Options granted under the Plan
shall be treated as Nonqualified Stock Options granted under Article V
to the extent of such excess.
4.6 Any Incentive Stock Option that fails to qualify under Code section 422
shall be treated as a Nonqualified Stock Option.
ARTICLE V - NONQUALIFIED STOCK OPTIONS
5.1 Nonqualified Stock Options may be granted to Eligible Participants to
purchase shares of Stock at such time or times determined by the
Committee, subject to the terms and conditions set forth in this Article
V.
5.2 The Nonqualified Stock Option exercise price per share of Stock shall be
established in the Agreement and may be more than, equal to or less than
100% of the Fair Market Value at the time of the grant, but may not be
less than par value of the Stock.
5.3 A Nonqualified Stock Option may be exercised in full or in part from
time to time within such period as may be specified by the Committee in
the corresponding Agreement; provided, that, in any event, the
Nonqualified Stock Option shall lapse and cease to be exercisable upon a
Termination of Service or within such period following a Termination of
Service as shall have been specified in the Nonqualified Stock Option
Agreement; provided, that such period following a Termination of Service
shall in no event extend the original exercise period of the
Nonqualified Stock Option.
5.4 The Nonqualified Stock Option Agreement may include any other terms and
conditions not inconsistent with this Article V or in Article VI, as
determined by the Committee.
ARTICLE VI - INCIDENTS OF STOCK OPTIONS
6.1 Each Stock Option shall be granted subject to such terms and conditions,
if any, not inconsistent with this Plan, as shall be determined by the
Committee, including any provisions as to continued employment as
consideration for the grant or exercise of such Stock Option and any
provisions that may be advisable to comply with applicable laws,
regulations or rulings of any governmental authority.
6.2 Except as provided below, a Stock Option shall not be transferable by
the Participant other than by will or by the laws of descent and
distribution or, to the extent otherwise allowed by applicable law,
pursuant to a qualified domestic relations order as defined
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by the Code or the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder, and shall be exercisable during the
lifetime of the Participant only by him or in the event of his death or
Disability, by his guardian or legal representative. However, a
Nonqualified Stock Option may be transferred and exercised by the
transferee to the extent permitted by the Committee and to the extent
determined by the Committee to be consistent with securities and other
applicable laws, rules and regulations and with Company policy.
6.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid
for at the time of exercise (or, in case of an exercise pursuant to a
cashless exercise mechanism described below, as soon as practicable
after such exercise) in cash or by tendering (either by actual delivery
or by attestation) shares of Stock held by the Participant for the
requisite period necessary to avoid a charge to the Company's earnings
for financial reporting purposes, as determined by the Committee in its
discretion, and valued as of the exercise date or in any combination
thereof in such amounts, at such times and upon such terms as shall be
determined by the Committee, subject to limitations set forth in the
corresponding Stock Option Agreement. The Committee may establish a
cashless exercise mechanism by which a Participant may pay the exercise
price under a Stock Option by irrevocably authorizing a third party to
sell shares of Stock (or a sufficient portion of the shares) acquired
upon exercise of the Stock Option and remit to the Company a sufficient
portion of the sales proceeds to pay the entire exercise price and/or
any tax withholding resulting from such exercise.
6.4 If a Stock Option Agreement so provides, the Committee may require that
all or part of the shares of Stock to be issued upon the exercise of a
Stock Option shall take the form of Restricted Stock, which shall be
valued on the date of exercise, as determined by the Committee, on the
basis of Fair Market Value of such Restricted Stock determined without
regard to the forfeiture restrictions involved.
6.5 No cash dividends shall be paid on shares of Stock subject to
unexercised Stock Options. The Committee may provide, however, that a
Participant to whom a Stock Option has been granted which is exercisable
in whole or in part at a future time for shares of Stock shall be
entitled to receive an amount per share equal in value to the cash
dividends, if any, paid per share on issued and outstanding Stock, as of
the dividend record dates occurring during the period between the date
of the grant and the time each such share of Stock is delivered pursuant
to exercise of such Stock Option. Such amounts (herein called "dividend
equivalents") may, in the discretion of the Committee, be:
(a) paid in cash or Stock either from time to time prior to, or at
the time of the delivery of, such Stock, or upon expiration of
the Stock Option if it shall not have been fully exercised; or
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(b) converted into contingently credited shares of Stock, with respect to which dividend equivalents may accrue, in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee.
Such Stock, whether delivered or contingently credited, shall be charged against the limitations set forth in Plan Section 3.5.
6.6 The Committee, in its sole discretion, may authorize payment of interest equivalents on dividend equivalents which are payable in cash at a future time.
6.7 If a Participant is required to pay to the Employer an amount with respect to income and employment tax withholding obligations in connection with exercise of a Nonqualified Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, in its discretion and subject to such rules as it may adopt, may permit the Participant to satisfy the obligation, in whole or in part, by surrendering shares of Stock which the Participant already owns or by making an irrevocable election that, in lieu of the issuance of Stock, a portion of the total Fair Market Value of the shares of Stock subject to the Nonqualified Stock Option and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, be surrendered for cash and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction.
6.8 The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at such price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Stock previously subject to them shall be available for the grant of other Stock Options.
6.9 The Committee may provide in any Stock Option Agreement entered into pursuant to the Plan, or by separate agreement, that if a Participant makes payment upon the exercise of any Stock Option granted under this Plan in whole or in part through the surrender of shares of Stock, such Participant shall automatically receive a new Stock Option for the number of shares of Stock so surrendered by him at a price equal to the Fair Market Value of the shares of Stock at the time of surrender, exercisable on the same basis and having the same terms as the underlying Stock Option or on such other basis as the Committee shall determine and provide in the Stock Option Agreement.
ARTICLE VII - RESTRICTED STOCK
7.1 Restricted Stock Awards may be made to Participants as incentives for the performance of future services that will contribute materially to the successful operation of the Employer. Awards of Restricted Stock may be made either alone or in addition to or in tandem with other Awards granted under the Plan.
7.2 With respect to Awards of Restricted Stock, the Committee shall:
(a) determine the purchase price, if any, to be paid for such Restricted Stock, which may be more than, equal to or less than par value and may be zero, subject to such minimum consideration as may be required by applicable law;
(b) determine the length of the Restriction Period;
(c) determine any restrictions applicable to the Restricted Stock such as service or performance;
(d) determine if the restrictions shall lapse as to all shares of Restricted Stock at the end of the Restriction Period or as to a portion of the shares of Restricted Stock in installments during the Restriction Period; and
(e) determine if dividends and other distributions on the Restricted Stock are to be paid currently to the Participant or paid to the Company for the account of the Participant.
7.3 Awards of Restricted Stock must be accepted within a period of 60 days, or such other period as the Committee may specify, by executing a Restricted Stock Agreement and paying whatever price, if any, is required. The prospective recipient of a Restricted Stock Award shall not have any rights with respect to such Award, unless such recipient has executed a Restricted Stock Agreement, has delivered a fully executed copy thereof to the Committee, and has otherwise complied with the applicable terms and conditions of such Award.
7.4 Except when the Committee determines otherwise, or as otherwise provided in the Restricted Stock Agreement, if a Participant terminates employment with the Employer for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and shall be reacquired by the Company.
7.5 Except as otherwise provided in this Article VII, or as otherwise provided in the Restricted Stock Agreement, no shares of Restricted Stock received by a Participant shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period.
7.6 To the extent not otherwise provided in a Restricted Stock Agreement, in
cases of death, Disability or Retirement or in cases of special
circumstances, the Committee may in its discretion elect to waive any or
all remaining restrictions with respect to such Participant's Restricted
Stock.
7.7 In the event of hardship or other special circumstances of a Participant
whose employment with the Employer is involuntarily terminated, the
Committee may in its discretion elect to waive in whole or in part any
or all remaining restrictions with respect to any or all of the
Participant's Restricted Stock, based on such factors and criteria as
the Committee may deem appropriate.
7.8 Upon an Award of Restricted Stock to a Participant, one or more stock
certificates representing the shares of Restricted Stock shall be
registered in the Participant's name. Such certificates may either:
(a) be held in custody by the Company until the Restriction Period
expires or until restrictions thereon otherwise lapse, and the
Participant shall deliver to the Company one or more stock
powers endorsed in blank relating to the Restricted Stock;
and/or
(b) be issued to the Participant and registered in the name of the
Participant, and shall bear an appropriate restrictive legend
and shall be subject to appropriate stop-transfer orders.
7.9 Except as provided in this Article VII or in the applicable Restricted
Stock Agreement, a Participant receiving a Restricted Stock Award shall
have, with respect to such Restricted Stock Award, all of the rights of
a shareholder of the Company, including the right to vote the shares to
the extent, if any, such shares possess voting rights and the right to
receive any dividends; provided, however, the Committee may require that
any dividends on such shares of Restricted Stock shall be automatically
deferred and reinvested in additional Restricted Stock subject to the
same restrictions as the underlying Award, or may require that dividends
and other distributions on Restricted Stock shall be paid to the Company
for the account of the Participant. The Committee shall determine
whether interest shall be paid on such amounts, the rate of any such
interest, and the other terms applicable to such amounts.
7.10 If and when the Restriction Period expires without a prior forfeiture of
the Restricted Stock subject to such Restriction Period, unrestricted
certificates for such shares shall be delivered to the Participant;
provided, however, that the Committee may cause such legend or legends
to be placed on any such certificates as it may deem advisable under the
rules, regulations and other requirements of the Securities and Exchange
Commission and any applicable federal or state law.
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7.11 In order to better ensure that Award payments actually reflect the
performance of the Company and the service of the Participant, the
Committee may provide, in its sole discretion, for a tandem
performance-based or other Award designed to guarantee a minimum value,
payable in cash or Stock to the recipient of a Restricted Stock Award,
subject to such performance, future service, deferral and other terms
and conditions as may be specified by the Committee.
ARTICLE VIII - STOCK AWARDS
8.1 A Stock Award shall be granted only in payment of compensation that has
been earned or as compensation to be earned, including without
limitation, compensation awarded concurrently with or prior to the grant
of the Stock Award.
8.2 For the purposes of this Plan, in determining the value of a Stock
Award, all shares of Stock subject to such Stock Award shall be valued
at not less than 100% of the Fair Market Value of such shares of Stock
on the date such Stock Award is granted, regardless of whether or when
such shares of Stock are issued or transferred to the Participant and
whether or not such shares of Stock are subject to restrictions which
affect their value.
8.3 Shares of Stock subject to a Stock Award may be issued or transferred to
the Participant at the time the Stock Award is granted, or at any time
subsequent thereto, or in installments from time to time, as the
Committee shall determine. If any such issuance or transfer shall not be
made to the Participant at the time the Stock Award is granted, the
Committee may provide for payment to such Participant, either in cash or
shares of Stock, from time to time or at the time or times such shares
of Stock shall be issued or transferred to such Participant, of amounts
not exceeding the dividends which would have been payable to such
Participant in respect of such shares of Stock, as adjusted under
Section 3.10, if such shares of Stock had been issued or transferred to
such Participant at the time such Stock Award was granted.
8.4 A Stock Award shall be subject to such terms and conditions, including
without limitation, restrictions on the sale or other disposition of the
Stock Award or of the shares of Stock issued or transferred pursuant to
such Stock Award, as the Committee shall determine; provided, however,
that upon the issuance or transfer of shares pursuant to a Stock Award,
the Participant, with respect to such shares of Stock, shall be and
become a shareholder of the Company fully entitled to receive dividends,
to vote to the extent, if any, such shares possess voting rights and to
exercise all other rights of a shareholder except to the extent
otherwise provided in the Stock Award. Each Stock Award shall be
evidenced by a written Agreement in such form as the Committee shall
determine.
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ARTICLE IX - AMENDMENT AND TERMINATION
9.1 The Board, at any time and from time to time, may amend or terminate the Plan. To the extent required by Code section 422 and/or the rules of the exchange upon which the Stock is traded, no amendment, without approval by the Company's shareholders, shall:
(a) alter the group of persons eligible to participate in the Plan;
(b) except as provided in Plan Section 3.10, increase the maximum number of shares of Stock which are available for issuance pursuant to Awards granted under the Plan;
(c) extend the period during which Incentive Stock Options may be granted beyond the date which is ten (10) years following the Effective Date;
(d) limit or restrict the powers of the Committee with respect to the administration of this Plan;
(e) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option;
(f) materially increase the benefits accruing to Participants under this Plan; or
(g) change any of the provisions of this Article IX.
9.2 The Committee shall be entitled to create, amend or delete appendices to this Plan as specified herein.
9.3 No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Company shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Award previously granted to such Participant under this Plan; provided, however, the Committee retains the right and power to treat any outstanding Incentive Stock Option as a Nonqualified Stock Option as provided herein.
9.4 Notwithstanding anything herein to the contrary, if the right to receive or benefit from any Award, either alone or together with payments that a Participant has the right to receive from the Employer, would constitute a "parachute payment" under Code section 280G, all such payments may be reduced, in the discretion of the Committee, to the largest amount that will avoid an excise tax to the Participant under Code section 280G.
ARTICLE X - MISCELLANEOUS PROVISIONS
10.1 Nothing in the Plan or any Award granted under the Plan shall confer
upon any Participant any right to continue in the employ of the
Employer, or to serve as a director or consultant thereof, or interfere
in any way with the right of the Employer to terminate his or her
employment or relationship at any time. Unless otherwise agreed to by
the Board, no Award granted under the Plan shall be deemed salary or
compensation for the purpose of computing benefits under any employee
benefit plan or other arrangement of the Employer for the benefit of its
employees unless the Employer shall determine otherwise. No Participant
shall have any claim to an Award until it is actually granted under the
Plan. To the extent that any person acquires a right to receive payments
from the Company under the Plan, such right shall, except as otherwise
provided by the Committee, be no greater than the right of an unsecured
general creditor of the Company. All payments to be made under the Plan
shall be paid from the general funds of the Company, and no special or
separate fund shall be established and no segregation of assets shall be
made to assure payment of such amounts, except as provided in Article
VII with respect to Restricted Stock and except as otherwise provided by
the Committee.
10.2 The Committee or the Company may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of any
taxes which the Employer is required by any law or regulation of any
governmental authority, whether federal, state or local, domestic or
foreign, to withhold in connection with any Award or the exercise
thereof, including, but not limited to, withholding the payment of all
or any portion of such Award or another Award under this Plan until the
Participant reimburses the Employer for the amount the Employer is
required to withhold with respect to such taxes, or canceling any
portion of such Award or another Award under this Plan in an amount
sufficient to reimburse itself for the amount it is required to so
withhold, or selling any property contingently credited by the Employer
for the purpose of paying such Award or another Award under this Plan,
in order to withhold or reimburse itself for the amount it is required
to so withhold. The amount withheld shall not exceed the statutory
minimum federal and state income and employment tax liability arising
from the exercise transaction.
10.3 The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by
any United States government or regulatory agency as may be required.
10.4 The terms of the Plan shall be binding upon the Employer, and its
successors and assigns.
10.5 The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor
of the Company. In its sole discretion, the
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Committee may authorize the creation of trusts or other arrangements to
meet the obligations created under the Plan to deliver shares of Stock
or payments in lieu of or with respect to Awards under the Plan;
provided, however, that, unless the Committee otherwise determines with
the consent of the affected Participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.
10.6 Each Participant exercising an Award under the Plan agrees to give the
Committee prompt written notice of any election made by such Participant
under Code section 83(b), or any similar provision thereof.
10.7 If any provision of this Plan or an Agreement is or becomes or is deemed
invalid, illegal or unenforceable in any jurisdiction, or would
disqualify the Plan or any Agreement under any law deemed applicable by
the Committee, such provision shall be construed or deemed amended to
conform to applicable laws or if it cannot be construed or deemed
amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Agreement, it shall be stricken
and the remainder of the Plan or the Agreement shall remain in full
force and effect.
10.8 The Committee may incorporate additional or alternative provisions for
this Plan with respect to residents of one or more individual states to
the extent necessary or desirable under state securities laws. Such
provisions shall be set out in one or more appendices hereto which may
be amended or deleted by the Committee from time to time.
IN WITNESS WHEREOF, this document is executed effective as of the date
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specified above.
SMART ONLINE, INC.
(CORPORATE SEAL)
By: /s/ D. Michael Nouri
----------------------------------
Dennis Michael Nouri, President
ATTEST:
/s/ Ronna Loprete
-------------------------------------
Secretary
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1998 STOCK OPTION PLAN
OF
SMART ONLINE, INC.
1. PURPOSE
The purpose of the 1998 Stock Option Plan of Smart Online, Inc. (the "Plan") is to encourage and enable selected key employees, directors, independent contractors, consultants and advisors in the service of Smart Online, Inc. (the "Corporation") or its related corporations to acquire or to increase their holdings of Class B common stock of the Corporation or any common stock into which the Class B Common Stock is reclassified or converted (the "Common Stock") in order to promote a closer identification of their interests with those of the Corporation and its shareholders, thereby further stimulating their efforts to enhance the efficiency, soundness, profitability, growth and shareholder value of the Corporation. This purpose will be carried out through the granting of incentive stock options ("incentive options") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("nonqualified options"). Incentive options and nonqualified options are referred to herein collectively as "options."
2. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Board of Directors of the Corpora-tion (the "Board"). The Board may, in its sole discretion, delegate all or part of its administrative authority with respect to the Plan to a committee of the Board (the "Committee"). In such event, references to the "Board" (except for Section 15 herein) shall include references to such committee. In the event that the Corporation shall become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Committee shall be comprised solely of two or more "non-employee directors," as said term is defined in Rule 16b-3 under the Exchange Act, unless the Board determines that such committee composition is not necessary or advisable. Further, in the event that the Corporation becomes subject to the requirements of Section 162(m) of the Code, the Committee shall, unless the Board determines otherwise, be comprised solely of two or more "outside directors," as such terms is defined under Section 162(m) or the regulations thereunder, or otherwise in accordance with Section 162(m) and such regulations.
(b) Any action of the Board may be taken by a written instrument signed by all of the members of the Board and any action so taken by written consent shall be as fully effective as if it had been taken by a majority of the members at a meeting duly held and called. Subject to the provisions of the Plan, the Board shall have full and final authority, in its discretion, to take any action with respect to the Plan including, without limitation, the following: (i) to determine the individuals to receive options, the nature of each option as an incentive option or a nonqualified option, the times when options shall be granted, the number of shares to be subject to each option, the option price (determined in accordance with Section 6), the option period, the time or times when and conditions upon which each option shall be exercisable, and the other terms, conditions, restrictions and limitations of an option; (ii) to prescribe the form or forms of the agreements evi-denc-ing any options granted under the Plan; (iii) to establish, amend and rescind rules and regulations for the administration of the Plan; and (iv) to construe and interpret the Plan, the rules and regulations, and the agreements evidencing options granted under the Plan, and to make all other determinations deemed necessary or advisable for administering the Plan. In addition,
the Board shall have complete authority, in its discretion, to accelerate the date that any option which is not otherwise exercisable shall become exercisable in whole or in part, without any obligation to accelerate such date with respect to any other option granted to any person.
(c) Notwithstanding Section 2(a) herein, the Board may
delegate to the chief executive officer, president or other officer of
the Corporation the authority to grant awards, and to make any or all
determinations reserved for the Board in the Plan and summarized in
Section 2(b) herein with respect to such awards, to any individual
otherwise eligible to participate in the Plan; provided that, (i) if the
Corporation shall become subject to the reporting requirements of the
Exchange Act, such individual is not an officer or director of the
Corporation (within the meaning of Section 16 of the Exchange Act) at
the time of the grant or determination; and (ii) if the Corporation
shall become subject to the requirements of Section 162(m) of the Code,
such person is not a "covered employee," as such term is defined under
Section 162(m) or the regulations thereunder.
3. EFFECTIVE DATE
The effective date of the Plan shall be November 12, 1998. Options may be granted under the Plan on and after the effective date, but not after November 11, 2008.
4. OPTIONS; SHARES OF STOCK SUBJECT TO THE PLAN
Both incentive options and nonqualified options, as designated by the
Board, may be granted under the Plan. Subject to adjustment as provided in
Section 10, the shares of Common Stock that may be issued and sold pursuant to
Options shall not exceed in the aggregate 900,000 shares of authorized but
unissued shares of the Common Stock of the Corporation or shares purchased on
the open market or by private purchase. The Corporation hereby reserves
sufficient authorized shares of Common Stock to provide for the exercise of
options granted hereunder. Any shares of Common Stock subject to an option
which, for any reason, expires or is terminated unexercised as to such shares
may again be subject to an option granted under the Plan.
5. ELIGIBILITY
An option may be granted only to an individual who satisfies the following eligibility requirements on the date the Option is granted:
(a) The individual is either (i) a key employee of the Corporation or a related corporation, (ii) a director of the Corporation or a related corporation, or (iii) an independent contractor, consultant or advisor (collectively, "independent contractors") providing services to the Corporation or a related corporation. Directors of the Corporation or a related corporation who are otherwise eligible to participate in the Plan may be granted options under the Plan. For this purpose, an individual shall be considered to be an "employee" only if there exists between the individual and the Corporation or a related corporation the legal and bona fide relationship of employer and employee. Also, for this purpose, a "key employee" is an employee of the Corpora-tion or a related corporation whom the Board determines qualifies as a key employee based on the nature and extent of such employee's duties, responsibilities, personal capabilities, performance and potential, or any combination of such factors.
(b) With respect to the grant of an incentive option, the individual is an employee who does not own, immediately before the time that the incentive option is granted, stock possessing more than ten percent of the total combined voting power of all classes of stock of the Corporation or a related corporation; provided, that an individual owning more than ten percent of the total combined voting power of all classes of stock of the Corpora-tion or a related corporation may be granted an incentive option if the price at which such option may be exercised is greater than or equal to 110% of the fair market value of the shares on the date the option is granted and the option period does not exceed five years. For this purpose, an individual will be deemed to own stock which is attributed to him under Section 424(d) of the Code.
(c) The individual, being otherwise eligible under this
Section 5, is selected by the Board as an individual to whom an option
shall be granted (an "optionee").
6. GRANT OF OPTIONS; OPTION PRICE
(a) Subject to the limitations of the Plan, the Board may in its sole and absolute discretion grant options to such eligible persons in such numbers, upon such terms and at such times as the Board shall determine. Both incentive options and nonqualified options may be granted under the Plan. To the extent that an option is designated as an incentive option but does not qualify as such, the option (or portion thereof) shall be treated as a nonqualified option.
(b) The price per share at which an option may be exercised (the "option price") shall be established by the Board at the time the option is granted and shall be set forth in the terms of the agreement evidencing the grant of the option; provided, that (i) the option price per share may not be less than the par value per share of the Common Stock; and (ii) in the case of an incentive option, the option price shall be equal to or greater than the fair market value per share of the Common Stock on the date the option is granted. In addition, the following rules shall apply:
(i) An incentive option shall be considered to be granted on the date that the Board acts to grant the option, or on any later date specified by the Board as the date of grant of the option. A nonqualified option shall be considered to be granted on the date the Board acts to grant the option or any other date specified by the Board as the date of grant of the option.
(ii) For the purposes of the Plan, the "fair market value" of the shares shall be determined in good faith by the Board in accordance with the following provisions: (A) if the shares of Common Stock are listed for trading on the New York Stock Exchange or the American Stock Exchange, the fair market value shall be the closing sales price per share of the shares on the New York Stock Exchange or the American Stock Exchange (as applicable) on the date immediately preceding the date the option is granted, or, if there is no transaction on such date, then on the trading date nearest preceding the date the option is granted for which closing price information is available, and, provided further, if the shares are quoted on the Nasdaq National Market or the Nasdaq SmallCap Market of the Nasdaq Stock Market but are not listed for trading on the New York Stock Exchange or the American Stock Exchange, the fair market value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system on the date
immediately preceding the date the option is granted for which such information is available; or (B) if the shares of Common Stock are not listed or reported in any of the foregoing, then the fair market value shall be determined by the Administrator in accordance with the applicable provisions of Section 20.2031-2 of the Federal Estate Tax Regulations, or in any other manner consistent with the Code and accompanying regulations.
(iii) In no event shall there first become exercisable by the Optionee in any one calendar year incentive stock options granted by the Corpora-tion or any related corporation with respect to shares having an aggregate fair market value (determined at the time an option is granted) greater than $100,000.
7. OPTION PERIOD AND LIMITATIONS ON THE RIGHT TO EXERCISE OPTIONS
(a) The term of an option (the "option period") shall be determined by the Board when the option is granted and shall not extend more than ten years from the date on which the option is granted. An option shall be exercisable on such date or dates, during such period, for such number of shares, and subject to such conditions as shall be determined by the Board and set forth in the agreement evidencing such option, subject to the right of the Board to accelerate the time when options may be exercised. Any option or portion thereof not exercised before the expiration of the option period shall terminate.
(b) An option may be exercised by giving written notice to the Corporation at such place and upon such conditions as the Corporation may direct. Such notice shall specify the number of shares to be purchased pursuant to an option and the aggregate purchase price to be paid therefor, and shall be accompanied by the payment of such purchase price. Such payment shall be in the form of (i) cash; (ii) check; (iii) if permitted by the Board, (A) shares of Common Stock owned by the optionee or withheld at the time of exercise; (B) promissory note (with such terms, conditions and restrictions as may be established by the Board); and/or (C) delivery of written notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the option price; or (iv) to the extent permitted by the Board, any combination of the foregoing methods. Shares tendered or withheld in payment upon exercise of an option shall be valued at their fair market value on the date of exercise, as determined by the Board by applying the provisions of Section 6(b)(ii).
(c) No option granted to an optionee who was an employee at the time of grant shall be exercised unless the optionee is, at the time of exercise, an employee as described in Section 5(a), and has been an employee continuously since the date the option was granted, subject to the following:
(i) An option shall not be affected by any change in the terms, conditions or status of the optionee's employment, provided that the optionee continues to be an employee of the Corporation or a related corporation.
(ii) The employment relationship of an optionee shall be treated as continuing intact for any period that the optionee is on military or sick leave or other bona fide leave of absence, provided that the period of such leave does not exceed ninety days, or, if longer, as long as the optionee's right to reemployment is
guaranteed either by statute or by contract. The employment relationship of an optionee shall also be treated as continuing intact while the optionee is not in active service because of disability. For purposes of this Section 7(c)(ii), "disability" shall mean the inability of the optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than twelve months. The Board shall determine whether an optionee is disabled within the meaning of this paragraph.
(iii) If the employment of an optionee is terminated because of disability within the meaning of subparagraph (ii), or if the optionee dies while he is an employee or dies after the termination of his employment because of disability, the option may be exercised only to the extent exercisable on the date of the optionee's termination of employment or death while employed (the "termination date"), except that the Board may in its discretion accelerate the date for exercising all or any part of the option which was not otherwise exercisable on the termination date. The option must be exercised, if at all, prior to the first to occur of the following, whichever shall be applicable: (A) the close of the period of twelve months next succeeding the termination date; or (B) the close of the option period. In the event of the optionee's death, such option shall be exercisable by such person or persons as shall have acquired the right to exercise the option by will or by the laws of intestate succession.
(iv) Unless an individual option agreement provides
otherwise, if the employment of the optionee is terminated for
any reason other than disability (as defined in subparagraph
(ii)) or death or for "cause," his option may be exercised to
the extent exercisable on the date of such termination of
employment, except that the Board may in its discretion
accelerate the date for exercising all or any part of the option
which was not otherwise exercisable on the date of such
termination of employment. The option must be exercised, if at
all, prior to the first to occur of the following, whichever
shall be applicable: (A) the close of the period of 90 days next
succeeding the termination date; or (B) the close of the option
period. If the optionee dies following such termination of
employment and prior to the earlier of the dates specified in
(A) or (B) of this sub-para-graph (iv), the optionee shall be
treated as having died while employed under subparagraph (iii)
immediately preceding (treating for this purpose the optionee's
date of termination of employment as the termination date). In
the event of the optionee's death, such option shall be
exercisable by such person or persons as shall have acquired the
right to exercise the option by will or by the laws of intestate
succession.
(v) Unless an individual option agreement provides otherwise, if the employment of the optionee is terminated for "cause," his option shall lapse and no longer be exercisable as of the effective time of his termination of employment, as determined by the Board. For purposes of this subparagraph (v) and subparagraph (iv), the optionee's termination shall be for "cause" if such termination results from the optionee's (A) dishonesty; (B) refusal to perform his duties for the Corporation; or (C) engaging in conduct that could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best interest of the Corporation. The determination of "cause" shall be made by the Board and its determination shall be final and conclusive.
(vi) Notwithstanding the foregoing, the Board shall have authority, in its discretion, to extend the period during which an option may be exercised or modify the conditions upon which an option may be exercised; provided that, in the event that any such extension or modification shall cause an incentive option to be designated as a nonqualified option, no such extension shall be made without the prior written request and consent of the optionee.
(d) Unless an individual option agreement provides otherwise, an option granted to an optionee who was non-employee a director or independent contractor of the Corporation or a related corporation at the time of grant (and who does not thereafter become an employee, in which case he shall be subject to the provisions of Section 7(c) herein) may be exercised only to the extent exercisable on the date of the optionee's termination of service to the Corporation or a related corporation (unless the termination was for cause), and must be exercised, if at all, prior to the first to occur of the following, as applicable: (A) the close of the period of 90 days next succeeding the termination date; or (B) the close of the option period. If the services of such an optionee are terminated for cause (as defined in Section 7(c)(v) herein), his option shall lapse and no longer be exercisable as of the effective time of his termination of services, as determined by the Board. Notwithstanding the foregoing, the Board may in its discretion accelerate the date for exercising all or any part of an option which was not otherwise exercisable on the termination date, extend the period during which an option may be exercised, or modify the conditions upon which an option may be exercised, or any combination of the foregoing.
(e) A certificate or certificates for shares of Common Stock acquired upon exercise of an option shall be issued in the name of the optionee (or his beneficiary) and distributed to the optionee (or his beneficiary) as soon as practicable following receipt of notice of exercise and payment of the option price. An optionee or his legal representative, legatees or distributees shall not be deemed to be the holder of any shares subject to an option unless and until certificates for such shares are delivered to him or them under the Plan.
(f) Nothing in the Plan shall confer upon the optionee any right to continue in the employment or service of the Corporation or a related corporation as an employee, director or independent contractor, as the case may be, or to interfere in any way with the right of the Corporation or a related corporation to terminate the optionee's employment or service at any time.
(g) If an optionee is subject to Section 16 of the Exchange Act, then, to the extent necessary to comply with Rule 16b-3, shares of Common Stock acquired upon exercise of an option may not, without the consent of the Board, be disposed of by the optionee until the expiration of six months after the date of grant of the option.
8. CHANGE OF CONTROL
(a) Except as provided in Section 8(b) herein, in the event of a Change of Control (as defined in Section 8(c) herein), all options outstanding as of the date of such Change of Control shall become fully exercisable, whether or not then otherwise exercisable. In such event, the Corporation shall provide optionees with a reasonable period of time, prior to the closing or effective date of the transaction constituting a Change of Control, during which to exercise such options and receive certificates representing shares acquired upon exercise.
(b) Notwithstanding the foregoing, in the event of a merger, share exchange, reorganization or other business combination affecting the Corporation or a related corporation, the Board may, in its sole and absolute discretion, determine that any or all options granted pursuant to the Plan shall not become exercisable on an accelerated basis, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken such action, including but not limited to the assumption of options granted under the Plan or the grant of substitute options or awards, as in the opinion of the Board is equitable or appropriate to protect the rights and interests of participants under the Plan.
(c) For the purposes herein, as "Change of Control" shall be deemed to have occurred on the earliest of the following dates:
(i) The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, fifty percent (50%) or more of the outstanding Common Stock of the Corporation (excluding for this purpose any person or entity owning more than fifty percent (50%) of the Common Stock as of the effective date of the Plan); or
(ii) The date the shareholders of the Corporation approve a definitive agreement (A) to merge or consolidate the Corporation with or into another corporation, in which the Corporation is not the continuing or surviving corporation or pursuant to which any shares of Common Stock of the Corporation would be converted into cash, securities or other property of another corporation, other than a merger of the Corporation in which holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger as immediately before, or (B) to sell or otherwise dispose of all or substantially all the assets of the Corporation;
For the purposes herein, the term "person" shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, other than the Corporation, a subsidiary of the Corporation or any employee benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, and the term "beneficial owner" shall have the meaning given the term in Rule 13d-3 under the Exchange Act.
9. NONTRANSFERABILITY OF OPTIONS AND SHARES
Incentive options shall not be transferable (including by pledge or hypothecation) other than by will or the laws of intestate succession. Nonqualified options shall not be transferable (including by pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Board in a manner consistent with the registration provision of the Securities Act of 1933, as amended (the "Securities Act"), or an exemption thereunder. An option shall be exercisable during the optionee's lifetime only by him.
10. DILUTION OR OTHER ADJUSTMENTS
If there is any change in the outstanding shares of Common Stock of the Corporation as a result of a merger, consolidation, reorganization, stock dividend, stock split distributable in shares, or other change in the capital stock structure of the Corporation, the Board shall make such adjustments to options, to the number of shares reserved for issuance and issuable under the Plan, and to any
provisions of this Plan as the Board deems equitable to prevent dilution or enlargement of options or otherwise advisable to reflect such change.
11. WITHHOLDING
The Corporation shall withhold all required local, state and federal taxes from any amount payable with respect to an option or shares of Common Stock acquired upon exercise of an option. The Corporation shall require any recipient of shares pursuant to the exercise of an option to pay to the Corporation in cash the amount of any tax or other amount required by any governmental authority to be withheld and paid over by the Corporation to such authority for the account of such optionee. Notwithstanding the foregoing, the Board shall have authority, in its discretion, to permit a recipient to elect to satisfy all or a portion of such obligations by electing to have the Corporation withhold shares of Common Stock to which the recipient is entitled in accordance with procedures established by the Board.
12. CERTAIN DEFINITIONS
For purposes of the Plan, the following terms shall have the meaning indicated:
(a) "Related corporation" means any parent, subsidiary or predecessor of the Corporation.
(b) "Parent" or "parent corporation" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation if, at the time that the Option is granted, each corporation other than the Corporation owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain.
(c) "Subsidiary" or "subsidiary corporation" means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if, at the time that the Option is granted, each corporation other than the last corporation in the unbroken chain owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in another corporation in the chain.
(d) "Predecessor" or "predecessor corporation" means a corporation which was a party to a transaction described in Section 424(a) of the Code (or which would be so described if a substitution or assumption under that Section had occurred) with the Corporation, or a corporation which is a parent or subsidiary of the Corporation, or a predecessor of any such corporation.
In general, terms used in the Plan shall, where appropriate, be given the meaning ascribed to them under the provisions of the Code applicable to incentive stock options.
13. STOCK OPTION AGREEMENT
The grant of any option under the Plan shall be evidenced by the execution of an agreement (the "agreement") between the Corporation and the optionee. Such agreement shall set forth the date of grant of the option, the option price, the option period, the designation of the option as an incentive option or a nonqualified option, and the time or times when and the conditions upon the happening of which the option shall become exer-cis-able. Such agreement shall also set forth the restrictions, if any, with respect to which the shares to be purchased thereunder shall be subject, and
such other terms and conditions as the Board shall determine which are consistent with the provisions of the Plan and applicable law and regulations.
14. RESTRICTIONS ON SHARES
The Corporation may impose such restrictions on any shares acquired upon exercise of options granted under the Plan as it may deem advisable, including, without limitation, restrictions necessary to ensure compliance with the Securities Act, the requirements of any stock exchange or self-regulatory organization and under any blue sky or state securities laws applicable to such shares. The Corporation shall not be under any obligation to issue, deliver or transfer shares, or to take any other action with respect to the Plan, unless such action is in compliance with applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). The Corporation may cause a restrictive legend to be placed on any certificate issued pursuant to the exercise of an Option in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel to the Corporation. The Corporation may require any optionee to become a party to a stockholder's agreement as a condition to the issuance of the shares upon exercise of an option.
15. AMENDMENT OR TERMINATION
The Plan and any option may be amended or terminated at any time by action of the Board; provided, that:
(a) The approval of the shareholders of the Corporation shall be required for any amendment to the Plan which requires such shareholder approval under applicable law, rule or regulation; and
(b) No outstanding option shall be amended or terminated (i)
without the consent of the optionee if such amendment or termination
would adversely affect the optionee's rights with respect to such
option; and (ii) if the option is an incentive option, without the
opinion of legal counsel to the Corporation that such amendment or
termination will not constitute a "modification" within the meaning of
Section 424 of the Code if the Board determines such an opinion is
necessary.
16. APPLICABLE LAW
Except as otherwise provided herein, the Plan shall be construed and enforced according to the laws of the State of North Carolina.
17. SHAREHOLDER APPROVAL
The Plan is subject to the approval of the shareholders of the Corporation, which approval must occur, if at all, within twelve months of the effective date of the Plan. All incentive options granted prior to shareholder approval shall be conditioned upon such approval, and no incentive option shall be exercisable prior to such approval.
IN WITNESS WHEREOF, this 1998 Stock Option Plan of Smart Online, Inc., is, by the authority of the Board of Directors of the Corporation, executed in behalf of the Corporation, effective the 12th day of November, 1998.
SMART ONLINE, INC.
By: /s/ D. Michael Nouri
-------------------------
D. Michael Nouri
President
Attest:
/s/ Johnny Jones
----------------------------
Johnny Jones
Secretary
|
[Corporate Seal]
1998 STOCK OPTION PLAN
OF
AMERICAN INSTITUTE FOR FINANCIAL RESEARCH, INC.
STOCK OPTION AGREEMENT
THIS AGREEMENT, made the ______ day of ____________, _____, between American Institute for Financial Research, Inc., a North Carolina corporation (the "Corporation"), and __________________________ (the "Optionee");
R E C I T A L S :
In furtherance of the purposes of the 1998 Stock Option Plan of American Institute for Financial Research, Inc. (the "Plan"), the Corporation and the Optionee hereby agree as follows:
1. The rights and duties of the Corporation and the Optionee under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, a copy of which has been delivered to the Optionee and the terms of which are incorporated herein by reference.
2. The Corporation hereby grants to the Optionee pursuant to the Plan, as a matter of separate inducement and agreement in connection with his employment with or service to the Corporation or related corporation, and not in lieu of any salary or other compensation for his services, the right and option (the "Option") to purchase all or any part of an aggregate of _______________ (_________) shares (the "shares") of the common stock of the Corporation, at the purchase price of _____________________________ Dollars ($__________) per share. The Option to purchase ________________ (________) of the shares shall be designated as an incentive option. The Option to purchase ______________________ (_______) of the shares shall be designated as a nonqualified option. To the extent that any option is designated as an incentive option and such Option does not qualify as an incentive option, it shall be treated as a nonqualified option. Except as otherwise provided in the Plan, the Option will expire if not exercised in full before _________________________, ______.
3. The Option shall become exercisable on the date or dates (and subject to any conditions) set forth on Schedule A attached hereto. To the extent that an Option which is exercisable is not exercised, such Option shall accumulate and be exercisable by the Optionee in whole or in part at any time prior to expiration of the option. Upon the exercise of an Option in whole or in part, the Optionee shall pay the option price to the Corporation in cash or by check [ADD ADDITIONAL PAYMENT ALTERNATIVES IF APPLICABLE], in accordance with the provisions of Section 7 of the Plan, and the Corporation shall as soon thereafter as practicable deliver to the Optionee a certificate or certificates for the shares purchased.
4. Nothing contained in this Agreement or the Plan shall require the Corporation or a related corporation to continue the employment or service of the Optionee for any particular period of time, nor shall it require the Optionee to remain in the employment of or in service to the Corporation or such related corporation for any particular period of time. Except as otherwise expressly provided in the Plan, all rights of the Optionee under the Plan with respect to the unexercised portion of his Option shall terminate upon termination of the employment or service of the Optionee with the Corporation or a related corporation.
5. This Option shall not be transferable (including by pledge or hypothecation) other than by will, the laws of intestate succession or pursuant to a qualified domestic relations order, and this Option shall be exercisable during the Optionee's lifetime only by the Optionee.
6. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective executors, administrators, next-of-kin, successors and assigns.
7. This Agreement may be modified or amended only by the written agreement of the parties hereto.
8. This Agreement shall be construed and enforced according to the laws of the State of North Carolina.
[ADDRESS SHAREHOLDERS', BUY-SELL, ETC. AGREEMENT REQUIREMENTS IF APPLICABLE.]
IN WITNESS WHEREOF, this Agreement has been executed in behalf of the Corporation and by the Optionee on the day and year first above written.
AMERICAN INSTITUTE FOR FINANCIAL RESEARCH, INC.
By: _______________________
Name: _______________________
Title: _______________________
Attest:
[Corporate Seal]
OPTIONEE
(SEAL)
1998 STOCK OPTION PLAN
OF
AMERICAN INSTITUTE FOR FINANCIAL RESEARCH, INC.
STOCK OPTION AGREEMENT
SCHEDULE A
Date option granted: __________________, _____ Date option expires: __________________, _____ Number of shares subject to option: _______ shares
Option price (per share): $________
Date Installment Percent of Shares to Incentive or First Exercisable Which Option is Exercisable Nonqualified Option ------------------------------------------------------------------------------- |
REORGANIZATION, LOCK-UP, PROXY AND RELEASE AGREEMENT
(ALTERNATIVE 1)
This Reorganization Lock-up Proxy and Release Agreement (the "AGREEMENT") is made and entered into as of January 1, 2004, by and between Smart Online, Inc., a Delaware corporation (the "CORPORATION"), and the undersigned stockholder of the Corporation ("STOCKHOLDER"). As used herein, the "Corporation" includes Smart Online, Inc. and any successor to substantially all of its business, whether by way of merger, asset sale or otherwise.
1. STOCK ISSUANCE AND CAPITAL RAISING ROYALTY.
(a) Effective immediately upon the later to occur (the "EFFECTIVE TIME") of (x) effectiveness of the Amendment of the Certificate of Incorporation set forth on SCHEDULE A attached hereto (the "AMENDMENT"), (y) effectiveness the conversion of all shares of Series A Preferred Stock of the Corporation into Common Stock at a rate of one share Common Stock for each share of Series A Preferred Stock converted and (z) the Corporation closing a Qualifying Financing:
(i) the Corporation shall issue to Stockholder as soon as practicable after the Effective Time one additional share of Common Stock for each share set forth next to the name of the Stockholder on the signature page of this Agreement ("ALTERNATIVE #1 SHARES") so that Stockholder will own two shares of Common Stock for each share of Series A Preferred Stock included in Alternative #1 Shares; and
(ii) Stockholder shall have the right to receive for each "Alternative #1 Share" within ten (10) business days after the closing of any Covered Capital Raising Transaction. The Capital Raising Royalty is the amount derived by multiplying the Net Proceeds derived from Covered Capital Raising Transactions by the Applicable Royalty Rate and then multiplying the result by the Pro Rata Share of Stockholder.
The Amendment shall not be filed with the Secretary of State of the State of Delaware until the closing of a Qualifying Financing. For purposes of determining when the Amendment can be filed and the Series A Preferred Stock converted, it shall be sufficient that the net proceeds and all signed documents in connection with the Qualifying Financing be held in escrow with the only condition to release being the filing of the Amendment and the conversion of the Series A Preferred Stock as contemplated above. Shares of Common Stock issuable pursuant to this Agreement or the conversion of the Series A Preferred Stock shall be deemed to be issued at the Effective Time of the Reorganization for all purposes of this Agreement notwithstanding that stock certificates are not issued until a later date. The term Reorganization shall mean the issuance of shares of Common Stock pursuant to this Agreement and pursuant to conversion of the Series A Preferred Stock.
The Corporation is required to use the first $2,000,000 of net proceeds of a Qualifying Financing first to repay all outstanding indebtedness in full (subject to reduction by any concessions creditors are willing to make), but the Corporation shall not be required to use net proceeds to pay in full outstanding indebtedness to current and former employees and affiliates who sign standstill agreements providing for a grace period on the payment of outstanding indebtedness through December 31, 2003. In the event that the Corporation is unable to obtain standstill agreements from each current and former employee and affiliate to which the Corporation is currently indebted providing a grace period on the payment of outstanding indebtedness through December 31, 2004,
then the aggregate amount of net proceeds for a Qualifying Financing shall be increased by the amount necessary to repay the debt of these employees and affiliates who have not signed standstill agreements. With respect to amounts owed to the Internal Revenue Service, net proceeds must be used to pay all taxes owed, but the Corporation may agree to make installment payments of interest and penalties on such basis as the Internal Revenue Service agrees. The Corporation shall satisfy this use of net proceeds if an amount of net proceeds required to pay the total indebtedness required to be paid hereunder is placed in escrow with the attorneys for the Corporation while the Corporation negotiates payments and releases with its creditors under escrow terms which prohibit use of escrowed funds for other purposes until the repayment of debt as described above. Until interest and penalties are determined by agreement with the Internal Revenue Service and are paid, the Corporation shall also maintain in such escrow 25% of the amount by which the net proceeds exceeds $2,000,000, such amount to be used to pay such interest and penalties.
"COVERED CAPITAL RAISING TRANSACTION" means (i) any Qualifying Financing occurring on or before December 31, 2004 and (ii) any other transaction in which the Corporation receives cash or cash equivalents from the sale of capital stock or debt convertible into shares of capital stock (including any exercise during 2004 of warrants or options issued in connection with the sale of capital stock or convertible debt occurring on or after the Effective Time and on or before December 31, 2004), provided the sale occurs on or after the Effective Time and on or before December 31, 2004.
"APPLICABLE ROYALTY RATE" means (i) 20% of Net Proceeds in excess of $5 million and up to $10 million, (ii) 30% of Net Proceeds in excess of Ten Million and up to $15 million and (iii) 40% of Net Proceeds in excess of $15 million and up to $20 million. In determining the forgoing dollar break points, all Net Proceeds received from any Covered Capital Raising Transaction shall be added together on a cumulative basis.
"NET PROCEEDS" means all cash and cash equivalents received by the Corporation in Covered Capital Raising Transactions, less investment banking fees, commissions and expenses and financial consulting, legal, accounting, travel and other fees and expenses incurred in the process of selling the securities not to exceed ten percent of the cash and cash equivalents received in such Capital Raising Transactions ("Net Proceeds").
"QUALIFYING FINANCING" means one or more sales by the Corporation of shares of its Common Stock for a purchase price of not less than an average of $1.30 per share for all shares issued in the financing (including shares issued to finders) and resulting in aggregate net proceeds (after deducting transaction expenses of up to 10% of money raised) of not less than $2,000,000, provided that (i) neither the number of shares sold nor the purchase price of such shares is subject to future adjustment (including any adjustment based on subsequent dilutive issuances or the Corporation's financial performance), (ii) neither the shares of Common Stock issued in such transaction(s) nor the purchasers of such shares of Common Stock are entitled to any liquidation preference, dividend rights or redemption right or any other right to receive greater economic benefits from ownership of their Common Stock than other holders of Common Stock, (it being understood that registration rights, Board voting or observer rights, first refusal rights, representations, warranties, indemnification and other similar contractual provisions do not disqualify this transaction from being a Qualifying Financing) or to any special voting or approval rights, except that the Corporation can agree (x) to elect a number of designees of the investors in a Qualifying Financing to its Board of Directors provided the
number is not more than one third of the number of Directors constituting the whole Board; and (y) to restrictions on the use of proceeds if such restrictions are not inconsistent with this Agreement, and (iii) the Corporation agrees to use at least $2,000,000 of the net proceeds from such financing to repay its outstanding indebtedness.
"PRO RATA SHARE" of Stockholder for purposes of calculating the Capital Raising Royalty means the percentage derived by dividing (i) the number of Reorganization Shares of Stockholder, by (ii) the aggregate number of Reorganization Shares of all stockholders of the Corporation who sign agreements with the Corporation requiring the Corporation to pay a Capital Raising Royalty.
"REORGANIZATION SHARES" means shares of Series A Preferred Stock owned by any stockholder of the Corporation who has signed any agreement requiring the Corporation to pay any Capital Raising Royalty.
(c) The Corporation shall have the right to require Stockholder to provide the following as a condition to Stockholder receiving any Alternative One Shares or the Corporation making any payment required by this Agreement:
(i) the certificate representing shares of Series A Preferred Stock of Stockholder; and
(ii) a stock power signed by Stockholder in form and substance acceptable to the Corporation.
(d) Stockholder hereby represents and warrants to the Corporation:
(i) Stockholder is the sole owner of the number of Series A Preferred Stock set forth on the signature page to this Agreement (the "Covered Preferred Shares") with full power to execute, deliver and perform this Agreement, and no consent or approval of any person or entity is required to execute, deliver and perform this Agreement;
(ii) There are no liens or other encumbrances on the Covered Preferred Shares;
(iii) Execution, delivery and performance of this Agreement by Stockholder does not violate any agreement the Stockholder has with any other person or entity;
(iv) All action required to authorize execution, delivery and performance of this Agreement by Stockholder has been taken; and
(v) Stockholder has reviewed the attached Business Plan dated December 2003 provided by the Corporation, fully understands the same and the Corporation has afforded the Stockholder the opportunity to ask any questions Stockholder desires to ask.
2. APPOINTMENT OF PROXY.
(a) The undersigned Stockholder hereby irrevocably constitutes and appoints Michael Nouri attorney and proxy with full power of substitution to act and vote all the shares of the Corporation held by the undersigned in connection with any meeting or written consent of the stockholders of the Corporation to approve the matters described below, and at any adjournment or adjournments thereof, provided such stockholders meeting is held, or written consent is circulated, on
or before April 30, 2004. The undersigned hereby directs this proxy to be voted solely with respect to the following matters:
(i) For approval of the Amendment to the Certificate of Incorporation in the form attached on Schedule A to this Agreement (the "Amendment").
(ii) For approval of the conversion of all shares of Series A Preferred Stock of the Corporation into Common Stock as provided in the Amendment.
(b) This proxy is given to induce the Corporation to enter into this Agreement, it being agreed by the undersigned Stockholder that entering into this Agreement causes the appointment of the named proxy to be coupled with an interest.
(c) In the event that, as the result of a stock split or stock dividend or combination of shares or any other change, or exchange for other securities, by reclassification, reorganization, merger, consolidation, recapitalization or otherwise, Stockholder should be entitled to new or additional or different shares of stock or securities, such new or substitute shares or securities shall be subject to this proxy.
(d) The Amendment shall not be filed with the Secretary of State of the State of Delaware until the closing of a Qualifying Financing.
3. LOCKUP AGREEMENT.
(a) Stockholder hereby agrees that, except as permitted under subsection (b) of this Section 3, during the Restricted Period, as defined herein, Stockholder will not:
(i) Sell any securities of the Corporation or Holding Company.
(ii) Transfer, assign or otherwise dispose of any securities of the Corporation or Holding Company.
(iii) Pledge, hypothecate or otherwise create a lien on any securities of the Corporation or the Holding Company.
(iv) Loan to any person or entity any securities of the Corporation or Holding Company.
(v) Sell short any securities of the Corporation or Holding Company.
(vi) Acquire a put option or grant a call option with respect to any securities of the Corporation or Holding Company.
(vii) Enter into any agreement concerning any of the foregoing transactions, or otherwise facilitate any other person conducting any of the foregoing transactions.
(b) For purposes of this Section 3, Holding Company shall mean any company whose stock is publicly traded (i) with which the Corporation merges or consolidates or (ii) of which the Corporation or its successor becomes a subsidiary. For purposes of this Section 3, the Restricted Period shall mean the period beginning on the Effective Time and ending on September 30, 2006.
Commencing October 1, 2005, Stockholder may sell, during any calendar month until the end of the Restricted Period, up to eight and one half percent (8.5%) of the shares of the Corporation owned by Stockholder as of the Effective Time or any shares of Holding Company issued in respect of such shares owned as of the Effective Time. The Board of Directors of the Corporation or Holding Company may terminate the Restricted Period or allow Stockholder to take a prohibited action prior to termination of the Restricted Period with respect to some or all of the securities owned by the Stockholder, if the Board provides all other stockholders of the Corporation or Holding Company who have the same Restricted Period with the same termination or waiver at the same time and to the same extent as for Stockholder.
(c) Notwithstanding the foregoing, provided the transferee first
signs a Lockup Agreement on substantially the terms set forth in this Section 3
and reasonably acceptable to the Corporation or Holding Company, Stockholder may
transfer securities of the Corporation or Holding Company without payment or
other consideration: (i) if Stockholder is an individual, to any family member,
(ii) if Stockholder is a corporation, to any direct or indirect parent or
subsidiary or any shareholder of Stockholder, (iii) if Stockholder is a
partnership, to any partner of Stockholder, (iv) if Stockholder is a limited
liability company, to any member of Stockholder, and (v) if Stockholder is a
trust, to any beneficiary of such trust.
(d) Stockholder further agrees that before and after termination of the Restricted Period, Stockholder will comply with all securities laws, rules and regulations when purchasing or reselling securities of the Corporation or Holding Company, including, without limitation, those prohibiting sales and purchases of securities while in possession of material nonpublic information.
(e) The securities of Stockholder shall have a legend in form and substance acceptable to the Corporation and Holding Company referring to the restrictions of this Agreement and the Corporation or Holding Company may instruct the transfer agent of the Corporation Holding Company to stop any transfer of any securities in violation of this Agreement and may take any other action required to avoid violation of this Agreement, including, without limitation, obtaining an injunction.
(f) Unless the Corporation obtains lock-up agreements at least as
restrictive as the provisions of this Section 3 from each of the following
groups of securities holders of the Corporation, which agreements cover all
securities of the Corporation owned by such persons immediately after the
Effective Time of the Reorganization (including options to acquire such
securities), the provisions of this Section 3 shall be of no force or effect:
(i) holders of 80% of the shares of Common Stock issued in the Reorganization to
persons who own Series A Preferred Stock immediately prior to the Effective Time
of the Reorganization and do not elect Alternative #2, (ii) Michael Nouri
(including any of his affiliates), (iii) each person who is an employee of the
Corporation as of the Effective Time of the Reorganization, (iv) holders of 80%
of the shares of Common Stock of the Corporation outstanding immediately
following the Effective Time of the Reorganization, not including shares issued
in a Qualifying Financing or shares of Common Stock issued in the Reorganization
to holders of Series A Preferred Stock, and (v) holders of options (but not
warrants) to purchase 75% of the shares of Common Stock issuable upon exercise
of all options outstanding immediately following the Effective Time of the
Reorganization.
The percentage of shares of capital stock of the Corporation owned by Stockholder that is subject to the provisions of this Section 3 shall be the percentage obtained by dividing (i) the aggregate number of shares of Common Stock outstanding immediately after the Effective Time of
the Reorganization (not including shares issued in the Qualifying Financing),
plus the number of shares of Common Stock issuable upon exercise of stock
options outstanding immediately after the Effective Time of the Reorganization
(not including any options issued in connection with the Qualifying Financing)
in each case owned by people who sign lockup agreements with provisions at least
as restrictive as this Section 3 by (ii) the aggregate number of shares of
Common Stock outstanding immediately after the Effective Time of the
Reorganization (not including shares issued in the Qualifying Financing), plus
the number of shares of Common Stock issuable upon exercise of stock options
outstanding immediately after the Effective Time of the Reorganization (not
including any options issued in connection with the Qualifying Financing).
4. RELEASES.
(a) In consideration of the release provided in subsection (b) below, Stockholder, for himself/herself/itself and for each of Stockholder's directors, officers, employees, agents, attorneys, legal successors and assigns, hereby absolutely, unconditionally and irrevocably releases and forever discharges the Corporation and its directors, officers, employees, agents, attorneys, legal successors and assigns, individually and jointly, from any and all causes of actions, suits, promises, representations, contracts, obligations, claims, counterclaims, defenses, demands, debts, accounts, reckonings, obligations, costs, rights of set off, demands or liabilities whatsoever, in law or equity, whether the same or whether the facts on which the same may be based are now known or unknown, suspected or unsuspected, which he/she/it, has, may have, has ever had, or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever occurring through the date of this Agreement arising out of Stockholder's purchase or ownership of any securities of the Corporation (collectively, "LIABILITIES").
(b) In consideration of the release provided in subsection (a) above, the Corporation hereby absolutely, unconditionally and irrevocably releases and forever discharges Stockholder and, as applicable, its directors, officers, employees, agents, attorneys, legal successors and assigns, individually and jointly, from any and all causes of actions, suits, promises, representations, contracts, obligations, claims, counterclaims, defenses, demands, debts, accounts, reckonings, obligations, costs, rights of set off, demands or liabilities whatsoever, in law or equity, whether the same or whether the facts on which the same may be based are now known or unknown, suspected or unsuspected, which he/she/it, has, may have, has ever had, or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever occurring through the date of this Agreement arising out of Stockholder's purchase or ownership of any securities of the Corporation (collectively, "LIABILITIES").
(c) It is the parties' intention in executing this Agreement and in giving and receiving the consideration called for by this Agreement that this Agreement shall be effective as a full and final accord and satisfaction and release of all Liabilities released under subsections (a) or (b) (the "RELEASED LIABILITIES"). Each party acknowledges that it is aware that it or its attorneys or its accountants may hereafter discover Liabilities or facts in addition to or different from those which it now knows or believes to exist with respect to the Released Liabilities, but that it is its intention hereby to fully, finally, and forever settle and release all disputes and differences with respect to the Released Liabilities. In furtherance of this intention, the releases hereby given shall be and remain in effect as a full and complete release notwithstanding the discovery or existence of any such additional or different Liability or fact.
(d) The above releases shall not be effective for any claims arising from a breach of this Agreement, for any claims relating to fraud or for any claims relating to any untrue statement of a material fact or any failure to disclose a material fact necessary in order to make the statements made with respect to the transactions contemplated by this Agreement, in light of the circumstances under which they were made, not misleading. Nothing contained herein shall be construed to supercede or amend the terms of any confidentiality, noncompetitive or similar agreement between Stockholder and the Corporation.
5. TERMINATION OF EXISTING AGREEMENTS. Stockholder and the Corporation hereby agree to terminate the Stock Rights Agreement dated as of August 10, 1999, as amended to date, and the Amended and Restated Stockholders' Agreement, dated as of August 6, 1999, as amended to date. Termination shall be effective upon the Effective Time.
6. TERMINATION OF THIS AGREEMENT. The Corporation agrees not to file the Amendment with the Secretary of State of the State of Delaware, unless the Corporation has closed a Qualifying Financing. This Agreement may be terminated by either Stockholder or the Corporation, if the Effective Time does not occur on or before April 30, 2004. Upon termination neither Stockholder nor the Corporation shall have any liability to the other arising out of the Agreement. Termination shall be effective upon receipt of written notice of termination provided by Stockholders to the principal office of the Corporation or by the Corporation to the address of Stockholder set forth below the signature of Stockholder.
7. This Agreement shall be subject to the laws of the State of Delaware.
8. This Agreement may be executed in one or more counterparts.
9. The Corporation may assign this Agreement to any successor to substantially all of its business.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first above written.
SMART ONLINE, INC.
By: _______________________________________
Michael Nouri, Chief Executive Officer
STOCKHOLDER:
______________ Number Shares of Series A Convertible Preferred Stock of Stockholder Subject to this Agreement. These shares are subject to Alternative #1 of the Reorganization.
SCHEDULE A
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION
OF
SMART ONLINE, INC.
(PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE)
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is Smart Online, Inc. (the "Corporation"). The Certificate of Incorporation was originally filed on August 10, 1993 under the name American Institute for Financial Research, Inc.
2. The Board of Directors of the Corporation duly adopted a resolution proposing and declaring it advisable that Article IVC4(b) of the Certificate of Incorporation of the Corporation be amended in its entirety to read as follows:
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock immediately upon, and contemporaneously with, (i) the closing of the sale of the Corporation's Common Stock in a public offering registered under the Securities Act of 1933, as amended (the "Act"), other than a registration relating solely to a transaction under Rule 145 under such Act (or any successor thereto) or to an employee benefit plan of the Corporation (a "Qualified Public Offering"), or (ii) the vote or written consent of 80 percent of the issued and outstanding shares of Series A Preferred Stock
3. This amendment to the Certificate of Incorporation was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of Delaware.
4. This amendment to the Certificate of Incorporation shall be effective on and as of the date of filing of this Certificate of Amendment with the Office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed in its name by its President on this the ___ day of _____________, 2004, and the statements contained herein are affirmed as true under penalties of perjury.
SMART ONLINE, INC.
By:_________________________________
D. Michael Nouri, President
LOCK-UP, PROXY AND RELEASE AGREEMENT FOR COMMON STOCK
This Agreement (the "AGREEMENT") is made and entered into as of January 1, 2004, by and between Smart Online, Inc., a Delaware corporation (the "CORPORATION"), and the undersigned stockholder or option holder of the Corporation ("STOCKHOLDER"). As used herein, the "Corporation" includes Smart Online, Inc. and any successor to substantially all of its business, whether by way of merger, asset sale or otherwise.
1. REORGANIZATION.
Stockholder hereby agrees that the proposed reorganization that would eliminate the outstanding shares of Series A Preferred Stock will make Stockholder's shares of Common Stock and/or options to purchase shares of Common Stock more valuable by eliminating certain rights of holders of Series A Preferred Stock, including liquidation preferences and redemption rights. Stockholder is entering into this Agreement because the holders of Series A Preferred Stock require the Corporation to enter into this Agreement with holders of Common Stock as part of the reorganization process. Sections 3 and 4 of this Agreement shall become effective immediately the Corporation ceasing to have any shares of Series A Preferred Stock issued or outstanding (the "EFFECTIVE TIME").
2. APPOINTMENT OF PROXY.
(a) The undersigned Stockholder hereby irrevocably constitutes and appoints Michael Nouri attorney and proxy with full power of substitution to act and vote all the shares of the Corporation held by the undersigned in connection with any meeting or written consent of the stockholders of the Corporation to approve the matters described below, and at any adjournment or adjournments thereof, provided such stockholders meeting is held, or written consent is circulated, on or before April 30, 2004. The undersigned hereby directs this proxy to be voted solely with respect to the following matters:
(i) For approval of the Amendment to the Certificate of Incorporation in the form attached on Schedule A to this Agreement (the "Amendment").
(ii) For approval of the conversion of all shares of Series A Preferred Stock of the Corporation into Common Stock as provided in the Amendment.
(b) This proxy is given to induce the Corporation to enter into this Agreement, it being agreed by the undersigned Stockholder that entering into this Agreement causes the appointment of the named proxy to be coupled with an interest.
(c) In the event that, as the result of a stock split or stock dividend or combination of shares or any other change, or exchange for other securities, by reclassification, reorganization, merger, consolidation, recapitalization or otherwise, Stockholder should be entitled to new or additional or different shares of stock or securities, such new or substitute shares or securities shall be subject to this proxy.
3. LOCKUP AGREEMENT.
(a) Stockholder hereby agrees that, except as permitted under subsection (b) of this Section 3, during the Restricted Period, as defined herein, Stockholder will not:
(i) Sell any securities of the Corporation or Holding Company.
(ii) Transfer, assign or otherwise dispose of any securities of the Corporation or Holding Company.
(iii) Pledge, hypothecate or otherwise create a lien on any securities of the Corporation or the Holding Company.
(iv) Loan to any person or entity any securities of the Corporation or Holding Company.
(v) Sell short any securities of the Corporation or Holding Company.
(vi) Acquire a put option or grant a call option with respect to any securities of the Corporation or Holding Company.
(vii) Enter into any agreement concerning any of the foregoing transactions, or otherwise facilitate any other person conducting any of the foregoing transactions.
(b) For purposes of this Section 3, Holding Company shall mean any company whose stock is publicly traded (i) with which the Corporation merges or consolidates or (ii) of which the Corporation or its successor becomes a subsidiary. For purposes of this Section 3, the Restricted Period shall mean the period beginning on the Effective Time and ending on September 30, 2006. Commencing October, 1, 2005, Stockholder may sell, during any calendar month until the end of the Restricted Period, up to eight and one half percent (8.5%) of the shares of the Corporation owned by Stockholder or any shares of Holding Company issued in respect of such shares (or options) owned by Stockholder as of September 30, 2005.
(c) Notwithstanding the foregoing, provided the transferee first
signs a Lockup Agreement on substantially the terms set forth in this Section 3
and reasonably acceptable to the Corporation or Holding Company, Stockholder may
transfer securities of the Corporation or Holding Company without payment or
other consideration: (i) if Stockholder is an individual, to any family member,
(ii) if Stockholder is a corporation, to any direct or indirect parent or
subsidiary or any shareholder of Stockholder, (iii) if Stockholder is a
partnership, to any partner of Stockholder, (iv) if Stockholder is a limited
liability company, to any member of Stockholder, and (v) if Stockholder is a
trust, to any beneficiary of such trust.
(d) Stockholder further agrees that before and after termination of the Restricted Period, Stockholder will comply with all securities laws, rules and regulations when purchasing or reselling securities of the Corporation or Holding Company, including, without limitation, those prohibiting sales and purchases of securities while in possession of material nonpublic information.
(e) The securities of Stockholder shall have a legend in form and substance acceptable to the Corporation and Holding Company referring to the restrictions of this Agreement and the Corporation or Holding Company may instruct the transfer agent of the Corporation Holding Company to stop any transfer of any securities in violation of this Agreement and may take any other action required to avoid violation of this Agreement, including, without limitation, obtaining an injunction.
(f) This Section 3 covers all securities of the Corporation and Holding Company whether currently owned or acquired after the date of this Agreement.
4. RELEASES.
(a) In consideration of the release provided in subsection (b) below, Stockholder, for himself/herself/itself and for each of Stockholder's directors, officers, employees, agents, attorneys, legal successors and assigns, hereby absolutely, unconditionally and irrevocably releases and forever discharges the Corporation and its directors, officers, employees, agents, attorneys, legal successors and assigns, individually and jointly, from any and all causes of actions, suits, promises, representations, contracts, obligations, claims, counterclaims, defenses, demands, debts, accounts, reckonings, obligations, costs, rights of set off, demands or liabilities whatsoever, in law or equity, whether the same or whether the facts on which the same may be based are now known or unknown, suspected or unsuspected, which he/she/it, has, may have, has ever had, or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever occurring through the date of this Agreement arising out of Stockholder's purchase or ownership of any securities of the Corporation (collectively, "LIABILITIES").
(b) In consideration of the release provided in subsection (a) above, the Corporation hereby absolutely, unconditionally and irrevocably releases and forever discharges Stockholder and, as applicable, its directors, officers, employees, agents, attorneys, legal successors and assigns, individually and jointly, from any and all causes of actions, suits, promises, representations, contracts, obligations, claims, counterclaims, defenses, demands, debts, accounts, reckonings, obligations, costs, rights of set off, demands or liabilities whatsoever, in law or equity, whether the same or whether the facts on which the same may be based are now known or unknown, suspected or unsuspected, which he/she/it, has, may have, has ever had, or hereafter can, shall or may have, for, upon or by reason of any matter, cause or thing whatsoever occurring through the date of this Agreement arising out of Stockholder's purchase or ownership of any securities of the Corporation (collectively, "LIABILITIES").
(c) It is the parties' intention in executing this Agreement and in giving and receiving the consideration called for by this Agreement that this Agreement shall be effective as a full and final accord and satisfaction and release of all Liabilities released under subsections (a) or (b) (the "RELEASED LIABILITIES"). Each party acknowledges that it is aware that it or its attorneys or its accountants may hereafter discover Liabilities or facts in addition to or different from those which it now knows or believes to exist with respect to the Released Liabilities, but that it is its intention hereby to fully, finally, and forever settle and release all disputes and differences with respect to the Released Liabilities. In furtherance of this intention, the releases hereby given shall be and remain in effect as a full and complete
release notwithstanding the discovery or existence of any such additional or different Liability or fact.
(d) The above releases shall not be effective for any claims arising from a breach of this Agreement, for any claims relating to fraud or for any claims relating to any untrue statement of a material fact or any failure to disclose a material fact necessary in order to make the statements made with respect to the transactions contemplated by this Agreement, in light of the circumstances under which they were made, not misleading. Nothing contained herein shall be construed to supercede or amend the terms of any confidentiality, noncompetitive or similar agreement between Stockholder and the Corporation.
5. TERMINATION OF EXISTING AGREEMENTS. Stockholder and the Corporation hereby agree to terminate the Stock Rights Agreement dated as of August 10, 1999, as amended to date, and the Amended and Restated Stockholders' Agreement, dated as of August 6, 1999, as amended to date. Termination shall be effective upon the Effective Time.
6. TERMINATION OF THIS AGREEMENT. This Agreement may be terminated by either Stockholder or the Corporation, if the Effective Time does not occur on or before April 30, 2004. Upon termination neither Stockholder nor the Corporation shall have any liability to the other arising out of the Agreement. Termination shall be effective upon receipt of written notice of termination provided by Stockholders to the principal office of the Corporation or by the Corporation to the address of Stockholder set forth below the signature of Stockholder.
7. This Agreement shall be subject to the laws of the State of Delaware.
8. This Agreement may be executed in one or more counterparts.
9. The Corporation may assign this Agreement to any successor to substantially all of its business.
[The remainder of the page is intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first above written.
SMART ONLINE, INC.
By: _______________________________________
Michael Nouri, Chief Executive Officer
STOCKHOLDER:
______________ Number Shares of Common Stock of Stockholder Subject to this Agreement.
SUBSCRIPTION AGREEMENT
(WITH WARRANTS)
Smart Online, Inc.
2530 Meridian Parkway
2nd Floor
Durham, North Carolina 27713
Attention: Michael Nouri
Gentlemen:
(1) Pursuant to prior understandings and discussions, the undersigned ("Subscriber") hereby agrees to purchase from Smart Online, a Delaware corporation (the "Company"), for a purchase price of Three Dollars and Fifty Cents ($3.50) per share (i) the number of shares of Common Stock, par value $0.001 per share ("Common Stock") set forth on the signature page of this Agreement and a minimum investment of $100,000 and (ii) a Warrant ("Warrants") to purchase the number of shares on Common Stock ("Warrant Shares") set forth on the signature page of this Agreement. (The Common Stock, Warrant Shares and warrant are sometimes hereinafter referred to collectively as the "Securities.") Subscriber hereby acknowledges (i) that this subscription shall not be deemed to have been accepted by the Company until the Company indicates its acceptance by returning to Subscriber an executed copy of this subscription, and (ii) that acceptance by the Company of this subscription is conditioned upon the information and representations of Subscriber hereunder being complete, true and correct as of the date of this subscription and as of the date of closing of sale of the Securities to Subscriber. As a condition to Subscriber's purchase of the Securities pursuant to this Agreement, Subscriber and the Company will execute and deliver to one another a copy of the Registration Rights Agreement in substantially the form attached hereto as APPENDIX A (the "Registration Rights Agreement") and the Company shall issue a Warrant in substantially the form of APPENDIX B hereto.
(2) Until actual delivery of the purchase price to the Company and acceptance by the Company of the purchase price and this Subscription Agreement, the Company shall have no obligation to Subscriber. The Company may revoke a prior acceptance of this Subscription Agreement at any time prior to delivery to and acceptance by the Company of the purchase price for the Securities.
(3) Subscriber hereby represents and warrants to the Company as follows:
(a) AUTHORIZATION. Subscriber has full power and authority to enter into this Agreement. This Agreement constitutes Subscriber's valid and legally binding obligation, enforceable in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, receivership, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) general principals of equity, the application of which may deny the Company the right to specific performance, injunctive relief and other equitable remedies.
(b) EXPERIENCE. Subscriber is experienced in evaluating and investing in private placement transactions of securities of technology companies such as the Company, has
such knowledge and experience in financial and business matters that Subscriber is capable of evaluating the merits and risks of Subscriber's investment in the Securities, is able to bear the economic risk of the investment and is prepared to hold the shares for an indefinite period of time.
(c) INVESTMENT. Subscriber is acquiring the Securities for investment for Subscriber's own account and not with a view to, or for resale in connection with, any distribution thereof, and Subscriber has no present intention of selling or distributing the Securities. Subscriber does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person with respect to any of the Securities other than as set forth in this Agreement. Subscriber understands that the Securities to be purchased by Subscriber have not been registered under the Securities Act of 1933, as amended (the "Act") by reason of a specific exemption from the registration provisions of the Act which depends upon, among other things, the bona fide nature of the investment intent as expressed herein.
(d) RELIANCE UPON SUBSCRIBER REPRESENTATIONS. Subscriber understands that the Securities are not registered under the Act on the grounds that the sale provided for in this Agreement and the issuance of Securities hereunder is being made in reliance upon an exemption from the registration requirements of the Act pursuant to Section 4(2) thereof as a transaction by an issuer of Securities not involving a public offering or pursuant to Section 4(6) thereof as a transaction by an issuer of securities solely to accredited investors, and is similarly exempt under applicable state securities laws, and that the Company's reliance on such exemption is predicated on Subscriber's representations as set forth in this Agreement.
(e) RESTRICTED SECURITIES. Subscriber acknowledges that the Securities have not been registered under the Act or any applicable state securities law and that the Securities may not be sold, assigned, pledged, hypothecated or transferred, unless there exists an effective registration statement therefor under the Act and all applicable state securities laws or the Company has received an opinion of counsel, reasonably acceptable to counsel for the Company, or other reasonable assurances, that such sale, assignment, pledge, hypothecation or transfer is exempt from registration. Subscriber understands that in the absence of an effective registration statement covering the Securities or an exemption therefrom under the Act and all applicable state securities laws, the Securities must be held indefinitely. In particular, Subscriber is aware that the Securities may not be sold pursuant to Rule 144 promulgated under the Act, unless all conditions of Rule 144 are met. Among the conditions for the use of Rule 144 may be the availability of current and adequate information to the public about the Company. Such information is not now available and, except as set forth in the Registration Rights Agreement, the Company has no obligation to make such information available. Notwithstanding the foregoing, no opinion of counsel shall be required by the Company in connection with the transfer of the Securities to an entity that is a direct or indirect wholly-owned subsidiary of Subscriber.
(f) LEGENDS.
(i) Each certificate or warrant agreement representing the Securities shall, in addition to any legends required elsewhere, bear the following legend as appropriate for stock certificates and warrant agreements:
THE SHARES REPRESENTED BY THIS CERTIFICATE AND WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR TRANSFERRED UNLESS THERE EXISTS AN EFFECTIVE REGISTRATION STATEMENT THEREFOR UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR THE ISSUER HEREOF HAS RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL OF THE ISSUER, THAT SUCH SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR TRANSFER IS EXEMPT FROM REGISTRATION.
(ii) Each certificate or warrant agreement representing Securities or Conversion Securities shall also bear any legend required by any applicable state securities law or by any other agreement to which the holder thereof is a party or by which the holder thereof is bound.
(iii) Each certificate or warrant agreement representing the Securities shall also bear a legend referring to the Lock-Up Agreement set forth in Section (5) below.
(g) NO PUBLIC MARKET. Subscriber understands that no public market now exists for any of the securities issued by the Company.
(h) ACCESS TO INFORMATION. Subscriber has received all information that Subscriber considers necessary or appropriate for deciding whether to purchase Securities. Subscriber has had an opportunity to ask questions and receive answers from the Company's management regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company and to obtain additional information from the Company (to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Subscriber or to which Subscriber had access.
(i) ACCREDITED INVESTOR. Subscriber recognizes it is important under the Act and state securities law that the Company determine if potential investors are "accredited investors," as defined in APPENDIX C attached hereto. Subscriber represents that Subscriber is an "accredited investor" by reason of having assets in excess of $5,000,000 USD, not formed for the specific purpose of investing in the company, whose purchase is directed by a sophisticated person having knowledge and experience in financial and business matters or any other "accredited investors"
definitions as defined in APPENDIX C. Subscriber further represents that Subscriber is a resident of the State of North Carolina.
(4) The representations, warranties, understandings, acknowledgments and agreements in this Agreement are true and accurate as of the date hereof, shall be true and accurate as of the date of the acceptance hereof by the Company and shall survive thereafter.
(5) LOCKUP AGREEMENT.
(a) Subscriber hereby agrees that, except as permitted under subsection (b) of this Section (5), during the Restricted Period, as defined herein, Subscriber will not:
(i) Sell any of the Securities or other securities of the Company or Holding Company received on account of ownership of the Securities (the "Lock-Up Securities").
(ii) Transfer, assign or otherwise dispose of any of the Lock-up Securities.
(iii) Pledge, hypothecate or otherwise create a lien on any of the Lock-Up Securities.
(iv) Loan to any person or entity any shares or other securities of the Company or Holding Company.
(v) Sell short any shares or other securities of the Company or Holding Company.
(vi) Acquire a put option or grant a call option with respect to any shares or other securities of the Company or Holding Company.
(vii) Enter into any agreement concerning any of the foregoing transactions, or otherwise facilitate any other person conducting any of the foregoing transactions.
(b) For purposes of this Section (5), Holding Company shall mean any company whose stock is publicly traded (i) with which the Company merges or consolidates or (ii) of which the Company or its successor becomes a subsidiary. For purposes of this Section (5), the Restricted Period shall mean the period beginning on the date of this Agreement and ending 18 months after the effective date of the first registration statement of the Company that registers for resale the Lock-Up Securities (the "Effective Date"). Notwithstanding the foregoing, after the Effective Date Subscriber may sell, during any rolling thirty-day period during the Restricted Period, up to 33% of the Lock-Up Securities owned by Subscriber on the Effective Date. The Board of Directors of the Company or Holding Company may terminate the Restricted Period or allow Subscriber to take a prohibited action prior to termination of the Restricted Period with respect to some or all of the Lock-Up Securities owned by the Subscriber, if the Board provides all other Subscribers of the Company or Holding Company who have the same Restricted Period with the same termination or waiver at the same time and to the same extent as for Subscriber.
(c) Notwithstanding the foregoing, provided the transferee
first signs a Lockup Agreement on substantially the terms set forth in this
Section 5 and reasonably acceptable to the Company or Holding Company,
Subscriber may transfer securities of the Company or Holding Company without
payment or other consideration: (i) if Subscriber is an individual, to any
family member, (ii) if Subscriber is a corporation, to any direct or indirect
parent or subsidiary or any shareholder of Subscriber, (iii) if Subscriber is a
partnership, to any partner of Subscriber, (iv) if Subscriber is a limited
liability company, to any member of Subscriber, and (v) if Subscriber is a
trust, to any beneficiary of such trust.
(d) Subscriber further agrees that before and after termination of the Restricted Period, Subscriber will comply with all securities laws, rules and regulations when purchasing or reselling securities of the Company or Holding Company, including, without limitation, those prohibiting sales and purchases of securities while in possession of material nonpublic information.
(e) The Lock-Up Securities of Subscriber shall have a legend in form and substance acceptable to the Company and Holding Company referring to the restrictions of this Agreement and the Company or Holding Company may instruct the transfer agent of the Company or Holding Company to stop any transfer of any securities in violation of this Agreement and may take any other action required to avoid violation of this Agreement, including, without limitation, obtaining an injunction.
(f) The provisions of this Section (5) shall continue in effect after the Lock-Up Securities are registered pursuant to the Registration Rights Agreement.
(6) This Agreement shall be enforced, governed and construed in all respects in accordance with the laws of the State of Delaware, as such laws are applied by Delaware courts to agreements entered into and to be performed in Delaware, and shall be binding upon Subscriber, the Subscriber's heirs, estate, legal representatives, successors and assigns and shall inure to the benefit of the Company and its successors and assigns.
(7) Subscriber agrees not to transfer or assign this Agreement, or any of Subscriber's interest herein, without the express written consent of the Company.
(8) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any and all prior or contemporaneous representations, warranties, agreements and understandings in connection therewith. This Agreement may be amended only by a writing executed by all parties hereto. This Agreement may be executed in one or more counterparts.
(The remainder of this page is intentionally left blank.)
IN WITNESS WHEREOF, Subscriber has executed this Subscription Agreement this ____ day of April, 2004.
SUBSCRIPTION
Number of Shares of Common Stock
Total payment
Number of Warrant Shares
1100 Longstone Way
(Address) -----------------------------------
(Name of Subscriber)
ACCEPTANCE
The foregoing Subscription Agreement is accepted on this the ____ day of ____________, 2004.
SMART ONLINE, INC.
By: ___________________________
Michael Nouri, President
APPENDIX A
FORM OF REGISTRATION RIGHTS AGREEMENT
APPENDIX B
FORM OF WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR TRANSFERRED UNLESS THERE EXISTS AN EFFECTIVE REGISTRATION STATEMENT THEREFORE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR THE ISSUER HEREOF HAS RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL OF THE ISSUER, THAT SUCH SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR TRANSFER IS EXEMPT FROM REGISTRATION.
SMART ONLINE, INC.
FORM OF COMMON STOCK WARRANT
Warrant No. W-________ ___________ __, 2004
This Warrant is issued to _____________________, and its permissible transferees, successors and assigns (the "HOLDER"), by Smart Online, Inc., a Delaware corporation (the "COMPANY"), for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged.
1. PURCHASE OF SECURITIES. Subject to the terms and conditions hereinafter set forth, the Holder shall be entitled, at any time during the Exercise Period (as set forth in Section 3 below), to purchase from the Company __________________________ (__________) shares (the "SHARES") of the Company's common stock (the "COMMON STOCK") (subject to adjustment as provided in Section 7 of this Warrant).
2. WARRANT PRICE. The exercise price per Share is $3.50 (subject to adjustment pursuant to Section 7 of this Warrant and subject to the cashless exercise provision of Section 4 of this Warrant) (the "WARRANT PRICE").
3. EXERCISE PERIOD. This Warrant may be exercised in whole or in part at any one or more times during the period (the "EXERCISE PERIOD") that begins with issuance of this Warrant and ends on ____________, 2006.
4. METHOD OF EXERCISE. While this Warrant remains outstanding and exercisable, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by:
(a) the surrender of this Warrant, together with a duly executed copy of the Notice of Exercise attached hereto as APPENDIX A to the Secretary of the Company at its principal offices; and
(b) payment of the Warrant Price at the Holder's election
either (i) in cash or by check or wire transfer in an amount equal to the
Warrant Price, or (ii) by forgiving any debt owed by Company to Holder in an
amount equal to the Warrant Price; or (iii) by delivery of shares of the
Company's Common Stock having a fair market value equal to the Warrant Price, or
(iv) by surrender of Warrants (a "NET ISSUANCE") as determined below. If the
Holder elects the Net Issuance method, the Company will issue Common Stock in
accordance with the following formula:
X = Y(A-B)
A
Where: X = the number of shares of Common Stock to be issued to
Holder.
Y = the number of shares of Common Stock requested to be
exercised under this Warrant.
A = the fair market value of one (1) share of Common Stock.
B = the Warrant Price.
|
For purposes of the above calculation, current fair market value of Common Stock shall be determined in accordance with the following.
(i) if the exercise is in connection with a public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value per Warrant Share shall be the initial "Price to Public" specified in the final prospectus with respect to the offering;
(ii) if this Warrant is exercised after, and not in connection with a public offering, and:
(a) if the Common Stock is traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices of such Common Stock over a 5 day period ending 3 days before the day the current fair market value of Warrant Shares is being determined; or
(b) if the Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid and asked prices of such Common Stock quoted on the NASDAQ system (or similar system, including the Over the Counter Bulletin Board) over the 5 day period ending 3 days before the day the current fair market value of the Warrant Shares is being determined; and
(c) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Common Stock shall be the price per share which the Company could obtain determined by agreement of the Company and the Holder, or in the absence thereof, by an investment banker acceptable to the Company and the Holder, and the Company shall pay any fees of the investment banker.
5. CERTIFICATES FOR SHARES. Upon the exercise of the purchase rights evidenced by this Warrant pursuant to Section 4 hereof, the Holder shall immediately be deemed a Holder of the Shares so purchased, and one or more certificates for the number of Shares so purchased shall be issued in the name of the Holder as soon as practicable following the receipt of the completed Notice of Exercise and payment of the purchase price for such Shares, and in any event within thirty (30) days thereafter. The Company may pay cash in lieu of issuing any fractional shares upon the exercise of the Holder's purchase rights under this Warrant.
6. RESERVATION OF SHARES. The Company covenants that, during the Exercise Period, the Company will reserve from its authorized and un-issued shares a sufficient amount to provide for the issuance of the Shares. The Company further covenants that such Shares, when issued pursuant to the exercise of this Warrant, will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof.
7. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The number of and kind of securities purchasable upon exercise of this Warrant, and the Warrant Price therefore, shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time prior to the expiration of this Warrant subdivide its outstanding Common Stock, by split-up or otherwise, or combine its outstanding Common Stock, or issue additional shares of its capital stock as a dividend with respect to any shares of Common Stock, the number of Shares issuable upon the exercise of this Warrant shall forthwith be proportionately increased in the
case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Warrant Price, but the aggregate purchase price payable for the total amount of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
(b) RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Shares issuable upon exercise of this Warrant shall be changed into a different form or class of securities of the Company, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares provided for above), the Holder shall, on exercise of this Warrant, be entitled to purchase, in lieu of the Shares that the Holder would have become entitled to purchase but for such change, an amount of such other securities equivalent to the amount that the Holder would have received had this Warrant been exercised immediately before that change, all subject to further adjustment as provided in this Section 7.
(c) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALE OF ASSETS. If at any time there shall be a capital reorganization of the Company's outstanding equity securities (other than a combination, reclassification, exchange, or subdivision of shares provided for elsewhere in this Warrant) or merger or consolidation of the Company with or into another corporation (other than a Liquidation Event), as a part of such capital reorganization, merger or consolidation, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Warrant Price then in effect, the number and class of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation, to which a holder of the Shares issuable upon exercise of this Warrant would have been entitled in such capital reorganization, merger or consolidation if this Warrant had been exercised immediately prior thereto. In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the capital reorganization, merger or consolidation such that the provisions of this Warrant (including adjustment of the Warrant Price then in effect and number of shares purchasable upon exercise of this Warrant) shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. The provisions of this paragraph shall similarly apply to successive capital reorganizations, mergers or consolidations.
(d) NOTICE OF ADJUSTMENTS. The Company shall give notice of
each adjustment or readjustment of the amount of Shares or other securities
issuable upon exercise of this Warrant and the Warrant Price to the registered
Holder at such Holder's address as shown on the Company's books within thirty
(30) days after the occurrence of the event resulting in such adjustment.
(e) NO CHANGE NECESSARY. The form of this Warrant need not be changed because of any adjustment in the amount of Shares issuable upon its exercise. A Warrant issued after any adjustment upon any partial exercise or in replacement may continue to express the same amount of Shares (appropriately reduced in the case of partial exercise) as are stated in this
Warrant as initially issued, and that number of shares shall be considered to have been so changed at the close of business on the date of adjustment.
(f) NO IMPAIRMENT. The Company shall not, by amendment of its Amended and Restated Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out all of the provisions of this Section 7 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Section 7 against impairment. If the Company takes any action affecting the Shares other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged.
8. NOTICE OF CERTAIN EVENTS. If the Company proposes at any time to effect any Liquidation Event, then, in connection with each such event, the Company shall give Holder at least twenty (20) days prior written notice of the date when the same will take place (and specifying the date on which the holders of Common Stock will be entitled to exchange their stock for securities or other property deliverable upon the occurrence of Liquidation Event).
9. EXERCISE, TRANSFER AND EXCHANGE RESTRICTIONS. The transfer, surrender or exchange of this Warrant or any of the Shares issued upon the exercise hereof is subject to any restrictions on transfer imposed by state and federal securities laws, including compliance with Regulation S under the Securities Act. Any Warrant or certificate representing Shares shall bear a legend substantially as follows:
The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended or any state securities laws, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act and applicable state securities laws or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required.
10. LOSS, THEFT, MUTILATION, ETC. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
11. NOTICES. All notices required under this Warrant shall be deemed to have been given or made (i) upon personal delivery, with acknowledgement received (ii) upon confirmation receipt that the communication was successfully sent to the applicable number if sent by
facsimile (with a copy of such notice sent no later than the next business day by reputable overnight courier service, with acknowledgement of receipt), (iii) upon receipt, when sent by reputable overnight courier service, with acknowledgement of receipt or (iv) three (3) business days after posting when sent by registered or certified United States mail, postage prepaid, return receipt requested. Notices to the Company shall be sent to the principal office of the Company (or at such other place as the Company shall notify the Holder hereof in writing). Notices to the Holder shall be sent to the address of the Holder at 1100 Longstone Way, Raleigh, NC 27614 (or at such other place as the Holder shall notify the Company hereof in writing).
12. WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing, signed by the party against which enforcement of such change, waiver, discharge or termination is sought.
13. SUCCESSOR AND ASSIGNS. This Warrant shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that the Company shall have no right to assign its rights, or to delegate its obligations, hereunder without the prior written consent of Holder.
13. REGISTRATION RIGHTS. The Holder of this Warrant shall have the same registration rights as are granted to any investor in a Warrant Triggering financing. Holder may transfer registration rights to any transferee of all or part of the Warrant.
14. WARRANT TRANSFERABLE. This Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder if a written opinion of counsel to Holder reasonably satisfactory to the Company has been delivered to the Company stating that such transfer will not violate the registration requirements of the Securities Act or any applicable state securities laws, provided that no such opinions shall be required in the event of transfer to any officer, director, shareholder or member of Holder or any affiliated person or company of Holder or any of the foregoing persons.
15. GOVERNING LAW. This Warrant shall be governed in all respects by the laws of the State of North Carolina without regard to its principles of conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer.
SMART ONLINE, INC.
By: ________________________________
Name: __________________________
Title: _________________________
APPENDIX A
FORM OF NOTICE OF EXERCISE
(Used at Time of Exercise)
Attention: Corporate Secretary
1. The undersigned, pursuant to the provisions of the attached Warrant, hereby elects to exercise such Warrant with respect to ___________ shares of Common Stock (the "Exercise Number"). Capitalized terms used but not otherwise defined herein have the meanings ascribed thereto in the attached Warrant.
2. The undersigned herewith tenders payment of US$____________ for
such shares or that number of shares of Company Common Stock as set forth in
Section 2 of the Warrant.
3. Please issue a certificate or certificates representing the shares issuable in respect hereof under the terms of the attached Warrant, as follows:
and deliver such certificate or certificates to the following address:
4. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.
5. If the Exercise Number is less than all of the shares of Common Stock purchasable pursuant to the Warrant, please issue a new warrant representing the remaining balance of such Shares, as follows:
and deliver such warrant to the following address:
In witness whereof, the undersigned Holder has caused this Notice of Exercise to be executed as of this _____ day of ____________, 200___.
By: _______________________________
Name:
Title:
APPENDIX C
An Accredited Investor is defined as follows:
(1) a natural person whose individual net worth, or joint net worth, with that person's spouse, at the time of purchase exceeds $1,000,000;
(2) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year (the year in which the purchase is made);
(3) any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of investing in the Company, whose purchase is directed by a sophisticated person having such knowledge and experience in financial and business matters that she is capable of evaluating the risks and merits of investing in the Company;
(4) a director or executive officer of the Company;
(5) an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(6) a bank as defined in the Securities Act of 1933 (the "Act"), or a savings and loan association or other institution as defined in the Act whether acting in its individual or fiduciary capacity; a broker or dealer registered under the Securities Exchange Act of 1934; an insurance company as defined in the Act; an investment company registered under the Investment Company act of 1940 or a business development company as defined in the Act; a Small Business Investment Company licensed under the Small Business Investment Act of 1958; an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, which is either a bank, savings and loan association, an insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
(7) a "private business development company" as defined in the Investment Advisers Act of 1940; or
(8) an entity in which all of the equity owners are accredited investors.
APPENDIX B
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of February 1, 2004, by and among Smart Online, Inc., a Delaware corporation with its headquarters located at 2530 Meridian Parkway, Durham, North Carolina 27713 (the "Company"), and the undersigned and signatories of counterparts of this Agreement (together with their respective affiliates and any assignees or transferees of all of their respective rights hereunder, the "Investors").
WHEREAS:
A. In connection with the Subscription Agreement by and among the parties hereto dated on or after February 1, 2004 (the "Subscription Agreement"), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Investors shares of the Company's common stock (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in such Subscription Agreement; and
B. To induce the Investors to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Investors hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the following meanings:
(i) "Investors" means any person who acquires shares of Common Stock of the Company, or any security of the Company pursuant to which the holder has a right to receive shares of Common Stock of the Company upon exercise or conversion of such security, who agrees to become bound by the provisions of this Agreement or a counterpart of this Agreement and permitted transfers and assignees of Investors in accordance with Section 9 hereof.
(ii) "Listing Date" the date on which the Common Stock of the Company becomes listed on the OTCBB.
(iii) "OTCBB" the Over-the-Counter Bulletin Board.
(iv) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC").
(v) "Registrable Securities" means (x) all shares of Common Stock sold by the Company on or after February 1, 2004 but before the date a Registration Statement covering the Reistrable Securities, including, without limitation, any shares issued pursuant to Section 2(b) of this Agreement (the "Damages Shares"); (y) all shares of Common Stock issued, or issuable pursuant to warrants or other securities, issued to any broker, dealer, finder or other person in connection with the sale of Registrable Securities; and (z) all shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing.
(vi) "Registration Statement" means a registration statement of the Company under the 1933 Act.
(b) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. No later than the earlier of (i) thirty (30) days after the date the Company raises at least $7,000,000 from one or more sales of shares of its securities occurring on or after February 1, 2004 and (ii) July 1, 2004 (the "Target Filing Date"), the Company shall prepare and file with the SEC a Registration Statement on Form S-1, SB-1 or SB-2 as determined by the Company in its sole discretion (or, if such Forms are not then available, on such form of Registration Statement as is then available) to effect a registration of the Registrable Securities covering the resale of the Registrable Securities. The Company may also include in such Registration Statement in its sole discretion, shares for sale by the Company or the Company may file a separate Registration Statement covering shares to be sold by the Company before, at the same time or after the Company files a Registration Statement covering resale of Registrable Securities by Investor.
(b) PAYMENTS BY THE COMPANY. The Company shall use its best efforts to obtain effectiveness of the Registration Statement as soon as reasonably practicable. If (i) the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not filed by the Target Filing Date, then the Company will make payments to the Investors in such amounts and at such times as shall be determined pursuant to this Section 2(b) as liquidated damages by reason of any such delay in their ability to sell the Registrable Securities (which remedy shall be exclusive of any other remedies available at law or in equity). The Company shall pay to each holder of Registrable Securities an amount (the "Damage Amount") equal to the product obtained by multiplying (i) the purchase price (the "Purchase Price") paid for the Registrable Securities by the Investor, by (ii) the Applicable
Percentage (as defined below) by (iii) the number of 30-day periods (prorated
for partial periods) after the Target Filing Date that the Registration
Statement covering the Registrable Securities of the Investor is actually filed;
provided, however, that there shall be excluded from such period any delays
which are attributable (i) to Investor, or any other Investor who holds
Registrable Securities, with respect to information relating to the Investors,
including, without limitation, the plan of distribution or beneficial ownership
of securities, or (ii) to the failure of any Investor (or legal counsel to the
Investor) to conduct their review of the Registration Statement pursuant to
Section 3(h) below in a reasonably prompt manner or (iii) any person or entity
named in the Prospectus as an underwriter. The term "Applicable Percentage"
means two percent (2%). (For example, if the Registration Statement is filed
thirty days after the Target Filing Date, the Company would pay as the Damage
Amount $2,000 for each $100,000 of the Purchase Price. In the sole discretion of
the Company, the Company may issue to Investor in lieu of the cash payment
described above, a number of shares of Common Stock of the Company equal to the
quotient derived by dividing (i) the Damage Amount, by (ii) Purchase Price per
share (as defined above).
(c) ELIGIBILITY FOR FORM S-3; CONVERSION TO FORM S-3. If the Company meets the registration eligibility and transaction requirements for the use of Form S-3 (or any successor form) for registration of the offer and sale by the Investor and any other Investors of their Registrable Securities before the earlier of the dates stated in clauses (ii) and (iii) in the definition of the Registration Period (as defined in Section 3(a) below), the Company shall file a Registration Statement on Form S-3 (or such successor form) with respect to the Registrable Securities covered by the Registration Statement, filed pursuant to Section 2(a) (and include in such Registration Statement on Form S-3 the information required by Rule 429 under the 1933 Act) or convert the Registration Statement, filed pursuant to Section 2(a) to a Form S-3 pursuant to Rule 429 under the 1933 Act and cause such Registration Statement (or such amendment) to be declared effective as soon as practicable after filing. If the Company becomes eligible to use Form S-3 during the Registration Period, the Company agrees to use reasonable efforts to file all reports required to be filed by the Company with the SEC in a timely manner so as to remain eligible or become eligible, as the case may be, and thereafter to maintain its eligibility, for the use of Form S-3. After such Registration Statement on Form S-3 become effective, subject to Section 3 hereof, the Company shall maintain such Registration Statement in effect until the earlier of clauses (ii) and (iii) in the definition of Registration Period in Section 3(a) hereof.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the Company shall have the following obligations:
(a) The Company shall prepare promptly, and use reasonable efforts to file with the SEC not later than the Target Filing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter use its best efforts to cause such Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing, and use reasonable efforts to keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) 270 days after the effective date of the Registration Statement; (ii) the date on which all of the Registrable
Securities have been sold by Investor and (iii) the date on which the Registrable Securities of Investor (in the opinion of counsel to the Company) may be immediately sold to the public without registration or restriction (including without limitation as to volume by Investor) under the 1933 Act (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading. The right of other Investors to have the Registration Statement remain in effect shall not confer any rights on Investor.
(b) The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Investor as set forth in the Registration Statement.
(c) If requested, the Company shall furnish to one legal counsel for all Investors whose Registrable Securities are included in a Registration Statement (i) promptly (but in no event more than two (2) business days) after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one copy of each Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, and, in the case of the Registration Statement referred to in Section 2(a), each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment), and (ii) promptly (but in no event more than two (2) business days) after the Registration Statement is declared effective by the SEC, such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by Investor. The Company will immediately notify one legal counsel representing all Investors where Registrable Securities are included in a Registration Statement by facsimile of the effectiveness of each Registration Statement or any post-effective amendment. The Company will promptly respond to any and all comments received from the SEC (which comments shall promptly be made available to one legal counsel representing all Investors whose Registration Securities are included in a Registration Statement upon request), with a view towards causing the Registration Statement or any amendment thereto to be declared effective by the SEC as soon as reasonably practicable, and (ii) promptly file an acceleration request as soon as reasonably practicable (but in no event more than two (2) business days) following the resolution or clearance of all SEC comments. If applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review, the Company shall promptly file with the SEC a final prospectus as soon as reasonably practicable (but in no event more than two (2) business days) following receipt by the Company from the SEC of an order declaring the Registration Statement effective.
(d) The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such other securities or "blue sky" laws of such jurisdictions in the
United States as the Investors who hold a majority of the Registrable Securities
being offered by the Registration Statement reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be reasonably necessary to maintain such
registrations and qualifications in effect during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (i) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (ii) subject itself
to general taxation in any such jurisdiction, (iii) file a general consent to
service of process in any such jurisdiction, (iv) provide any undertakings that
cause the Company undue expense or burden, (v) make any change in its charter or
bylaws, or (vi) spend more than $10,000 in filing fees and legal fees and
expenses for such "blue sky" compliance.
(e) If the Company has not selected an underwriter for the offering, and in the event Investors who hold a majority of the Registrable Securities being offered by the Registration Statement select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering.
(f) As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor of the happening of any event, of
which the Company has knowledge, as a result of which the prospectus included in
any Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to any Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request; provided that, for not more than sixty (60) consecutive
trading days (or a total of not more than ninety (90) trading days in any twelve
(12) month period), the Company may delay the disclosure of material non-public
information concerning the Company (as well as prospectus or Registration
Statement updating) the disclosure of which at the time is not, in the good
faith opinion of the Company, in the best interests of the Company (an "Allowed
Delay"); provided, further, that the Company shall promptly (i) notify the
Investors in writing of the existence of material non-public information giving
rise to an Allowed Delay and (ii) advise the Investors in writing to cease all
sales under such Registration Statement until the end of the Allowed Delay. Upon
expiration of the Allowed Delay, the Company shall again be bound by the first
sentence of this Section 3(f) with respect to the information giving rise
thereto.
(g) The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order within a reasonable time and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof.
(h) The Company shall permit a single firm of legal counsel designated by Investors who own a majority of the Registrable Securities offered under the Registration Statement to review such Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC. The role of such legal counsel to the Investors shall be to confirm that the sections of such Registration Statement covering information with respect to the Investors, the Investor's beneficial ownership of securities of the Company and the Investors intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Investors, subject to review and approval by the Company and its legal counsel. Such legal counsel for the Investors shall not have the right to require changes to the description of the Company, its business or other matters not related to selling stockholders.
(i) The Company shall make generally available to its security holders as soon as practicable, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement.
(j) Until the Registration Statement ceases to be effective, the Company shall make available for inspection following reasonable prior written notice by (i) any underwriter participating in any disposition pursuant to a Registration Statement, (ii) one firm of attorneys or other agents retained by the Investors who own a majority of the Registrable Securities, and (iii) one firm of attorneys retained by all such underwriters (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction, or (b) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to allow such inspection more than once per calendar year. Following such due diligence review, Investor may require the Company to withdraw the Registrable Securities of such Investor from the Registration Statement, if the Company does not make changes to the Registration Statement requested by such Investor.
(k) The Company shall not be required to disclose any
confidential information in such Records to any Inspector or to any Investor
pursuant to this Agreement until and unless such Inspector and Investor shall
have entered into confidentiality agreements (in form and substance satisfactory
to the Company) with the Company with respect thereto. Each Investor agrees that
it shall, upon learning that disclosure of such Records or other information is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential. Nothing herein
(or in any other confidentiality agreement between the Company and any Investor)
shall be deemed to limit the Investor's ability to sell Registrable Securities
in a manner which is otherwise consistent with applicable laws and regulations.
(l) The Company shall (i) cause all the Registrable
Securities covered by the Registration Statement to be listed on each national
securities exchange, if any, on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) to the extent the securities of the same class or series are not then
listed on a national securities exchange, to use reasonable efforts to arrange
for at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities.
(m) The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement.
(n) At the request of the holders of a majority of the Registrable Securities offered pursuant to the Registration Statement, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement.
(o) The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least five (5) business days prior to the first anticipated
filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor.
(b) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statements.
(c) In the event the Company or Investors holding a majority of the Registrable Securities being registered determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement.
(d) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.
(e) No Investor may participate in any underwritten registration hereunder unless such Investor if requested by the Company (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below. Notwithstanding the foregoing, there is no obligation on the part of the Company or any underwriter to include Registrable Securities of Investor in the securities to be purchased or sold by the underwriter.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel selected by the Investors holding a majority of the Registrable Securities shall be borne by the Company, provided the Company shall not be required to pay legal fees and disbursements of such legal counsel in excess of $15,000.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify, hold harmless and defend (i) each Investor who holds such Registrable
Securities, (ii) the directors, officers, partners, employees, agents and each
person who controls any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any
underwriter (as defined in the 1933 Act) for the Investors, and (iv) the
directors, officers, partners, employees and each person who controls any such
underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement of a material fact in a Registration Statement or the omission to
state therein a material fact required to be stated or necessary to make the
statements therein not misleading; (ii) any untrue statement of a material fact
contained in any preliminary prospectus if used prior to the effective date of
such Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading; or (iii) any violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6(c) with respect to the number of
legal counsel, the Company shall reimburse the Indemnified Person, promptly as
such expenses are incurred and are due and payable, for any reasonable legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified Person, or any of their legal counsel, expressly for use in
connection with the preparation of such Registration Statement or any such
amendment thereof or supplement thereto; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which
an Investor is participating, each such Investor agrees severally and not
jointly to indemnify, hold harmless and defend, to the same extent and in the
same manner set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other shareholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such shareholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim to which any of them may become subject,
under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim arises out
of or is based upon any Violation by such Investor, in each case to the extent
(and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor,
or its legal counsel, expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will reimburse any legal or
other expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Agreement (including this Section 6(b) and
Section 7) for only that amount as does not exceed the net proceeds to such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the
Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority-in-interest of the Investors), if the Investors are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any seller of Registrable Securities who was not
guilty of such fraudulent misrepresentation, and (iii) contribution (together
with any indemnification or other obligations under this Agreement) by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to use its best efforts to:
(a) make and keep public information available, as those terms are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and
(c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act and (ii) such other
information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities if:
(i) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein, (v) such transfer shall have been made in
accordance with the applicable requirements of the Subscription Agreement, and
(vi) such transferee shall be an "accredited investor" as that term defined in
Rule 501 of Regulation D promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company and Investors who hold a majority of the Registrable Securities, except that any person or entity who acquires Registrable Securities may become a part to this Agreement by the Company and such person or entity signing a counterpart of this Agreement. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. In the event the Company becomes a subsidiary of any company whose Common Stock is publicly traded ("Holding Company"), and the Investor receives shares of Common Stock of such Holding Company, all obligations of the Company under this Agreement shall terminate upon such Holding Company assuming this Agreement, which may be done without the consent or approval of Investor.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.
(b) Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective
five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:
If to the Company:
Michael Nouri
Smart Online, Inc.
Post Office Box 12794
Research Triangle Park, NC 27709-2794
Telephone: (919) 765-5000
E-mail: dnouri@us.smartonline.com
With copies to:
Daniels Daniels & Verdonik, P.A.
Post Office Drawer 12218
Research Triangle Park, NC 27709-2218
Telephone: (919) 544-5444
Facsimile: (919) 544-5920
Email: jverdonik@d2vlaw.com
If to an Investor:
to the address set forth immediately below such Investor's name on the signature pages to the Subscription Agreement.
(c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
(d) THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.
(e) In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
(f) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This
Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.
(g) Subject to the requirements of Section 9 hereof, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.
(h) The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.
(i) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
(j) Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
(k) Except as otherwise provided herein, all consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if the all options, warrants and convertible securities then outstanding have been issued and/or converted into Registrable Securities.
(l) The Company and each Investor acknowledges that a breach by it of its obligations hereunder will cause irreparable harm by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the parties acknowledge that the remedy at law for breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach of any of the provisions under this Agreement, that the other parties shall be entitled, in addition to all other available remedies in law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
(m) The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
(n) No Investor may bring any legal or other action or proceeding for breach of this Agreement or arising out of any matter related to this Agreement, unless the Investors who own a majority of the Registrable Securities consent to the bringing of such action. Any
claim may be settled by the Company and the Investors who own a majority of the Registrable Securities.
(o) In determining a majority of the Registrable Securities, Investors are deemed to own all Registrable Securities issuable pursuant to any options, warrants convertible securities or other rights to acquire Registrable Securities, whether or not then exercisable or convertible.
[The Remainder of this Page is Blank.]
IN WITNESS WHEREOF, the Company and the undersigned Investors have caused this Agreement to be duly executed as of the date on the first page of this Agreement.
SMART ONLINE, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
INVESTOR:
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between Smart Online, Inc. a Delaware corporation (the "Company"), and Michael Nouri (the "Employee"), dated as of the 1st day of April, 2004.
WITNESSETH THAT
WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; and
WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and
WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and
WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's grant of options hereunder, employment of the Employee under the terms of this Agreement, and for other additional good and valuable consideration, the receipt and sufficiency of which are hereby conclusively acknowledged;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to the terms of this Agreement shall commence on June1, 2004, and shall terminate on the first to occur of (i) the termination of this Agreement as provided herein, or (ii) December 31, 2005; provided, however, that if neither party has given written notice to the other, at least one hundred eighty (180) days prior to the expiration date then in effect, of the intention not to renew the Agreement beyond such expiration date or the expiration date for any renewal period, then the term of this Agreement shall automatically extend for an additional two (2) years at the conclusion of the expiration date for the initial term or renewal period as applicable. The term during which this Agreement is in effect is referred to herein as the "Employment Period."
2. POSITION AND DUTIES.
(a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as President, Chief Executive Officer and Treasurer, with such duties
and responsibilities as are customarily assigned to such position and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board of Directors.
(b) During the Employment Period, the Employee shall devote his loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently.
(c) The Employee shall supervise and manage the Company's worldwide operations and activities.
3. COMPENSATION.
(a) Base Salary. The Employee's base salary initially shall be $170,000 per annum, payable monthly, which salary shall be evaluated annually and is subject to such increases as the Board of Directors of the Company approves (in either case, as applicable for such periods, "Annual Base Salary").
(b) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company (including but not limited to disability, health, life and dental insurance) for which senior management employees are eligible generally.
(c) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes.
4. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "Disability Effective Date").
(b) By the Company.
(i) The Company may terminate the Employee's employment during the Employment Period for Cause or Without Cause. A termination of the
Employee's employment with Cause shall be effective when communicated to the Employee by written notice. "Cause" means:
A. participation in a fraud or theft against the Company;
B. any chemical dependence which materially adversely affects the performance of his duties and responsibilities to the Company;
C. breach of Employee's fiduciary obligations to the Company in a material respect;
D. Employee repeatedly willfully fails to perform his duties after written notice with reasonable opportunity to cure;
E. material breach of the Company's policies or any material provision of this Agreement;
F. gross misconduct resulting in substantial loss to the Company or damage to the reputation of the Company; or
G. knowing material violation of securities laws, rules or regulations.
(ii) "Without Cause" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by written notice.
(c) By the Employee. The Employee may signify his intention
to terminate his employment at any time upon the giving of one hundred eighty
(180) days' notice ("Notice Period") to the Company of his intent to do so. Upon
the expiration of the Notice Period the termination will be effective and the
Date of Termination will be effective as referred to below. The Company reserves
the right to accelerate the effective "Date of Termination" in its discretion
after the inception of the Notice Period.
(d) Date of Termination. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or Without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Termination by the Company without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as defined in Section 4(b) above) or if the Employee terminates his employment for Good Reason (as
defined below) at any time during which the Employee does not directly, or indirectly through one or more intermediaries, control the Company:
(i) the Company shall pay the Employee the portion of his base salary in effect at the time of termination as he may be entitled to receive for services rendered prior to the date of such termination;
(ii) the Company shall pay the Employee for any accrued but unused vacation;
(iii) for a period of twelve (12) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee his base salary in effect at the time of his termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if he had remained employed by the Company pursuant to this Agreement during the entire such twelve (12) month period; and
(iv) the Company shall take all action necessary to provide that the all stock options held by the Employee shall become fully vested and exercisable, to the extent not already fully vested and exercisable, as of the date of such termination of employment.
For purposes of this Agreement, the Employee shall be deemed to have terminated his employment for "Good Reason" if he voluntarily terminates his employment with the Company under any of the following circumstances:
(i) any demotion or diminution in the Employee's position, title, reporting position or duties;
(ii) any reduction in the Employee's base salary;
(iii) failure to reelect Employee as a member of the Company's board of directors;
(iv) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or
(v) any material breach of this Agreement by the Company.
(b) Termination on Account of Death or Disability. If the
Company terminates the employment of the Employee on account of Disability (as
defined in Section 4(a) above) of the Employee, or in the event of the
Employee's death, the Company shall pay or provide to the Employee or his
beneficiary such compensation and benefits as are set forth in subsections
(a)(i), (a)(iii) and (a)(iv) above.
(c) Termination with Cause. If the Company terminates the employment of the Employee with Cause (as defined in Section 4(b) above), the Company shall pay the Employee or his beneficiary such compensation as is set forth in subsections (a)(i) and (a)(ii) above.
6. CHANGE IN CONTROL.
(a) If a Change in Control (as defined in subsection (b) below) occurs and, following the Change in Control either (i) Employee remains employed with the surviving entity for such period of time as shall be specified by the board of directors (or other governing body) of such surviving entity at the time of such Change in Control, (ii) Employee's employment is terminated by the Company without Cause, or (iii) Employee terminates his employment for Good Reason as described in Section 5(a), the Company shall make a lump sum payment to the Employee on the expiration date of the period of time referred to in clause (i) or the effective date of the termination referred to in clause (ii) or (iii), as applicable, of an amount equal to the lesser of (x) 2.99 times that highest amount of the annual cash compensation (including cash bonuses and other cash-based benefits, including for these purposes amounts earned or payable whether or not deferred) received from the Company during any of the five calendar years preceding such date and (y) the largest amount payable to the Employee that would not trigger an excise tax payable by the Employee pursuant to Section 280G of the Internal revenue Code of 1986, as amended. Such payment shall be in addition to the payments and benefits provided in Section 5 (a)(i), 5(a)(ii) and 5(a)(iv) but in lieu of any other salary or benefits under this Agreement.
(b) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred on the earliest of the following dates:
(i) the date on which any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, thirty percent (30%) or more of the outstanding Common Stock of the Company (excluding for this purpose any person or entity beneficially owning more than 50% of the Common Stock of the Company as of the date hereof); or
(ii) the date the shareholders of the Company approve a definitive agreement to (A) merge or consolidate the Company with or into another corporation other than with respect to a merger or consolidation which would result in the voting securities of the Company beneficially owned by Employee immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; (B) sell or otherwise dispose of all or substantially all of the assets of the Company; or (C) dissolve or liquidate the Company.
7. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish.
8. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that:
(a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and
(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability rendering him incapable of performing the essential functions involved in his anticipated duties or that would otherwise hinder the performance of duties under this Agreement.
9. COVENANT NOT TO COMPETE. The Employee covenants that during the "Noncompetition Period," as defined in paragraph 15, and within the "Noncompetition Area," as defined in paragraph 16, he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency (other than the Company) engage in the "Business," as defined in paragraph 17. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, he shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business.
10. NONDISCLOSURE COVENANT.
(a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "Confidential Data"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that his relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) he shall keep and maintain the Confidential Data in strictest confidence, and (ii) he shall not, either directly or indirectly, use any Confidential Data for his own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will
return to the Company all Company documents, notes, programs, data and any other materials (including any copies thereof) in his/her possession.
(b) For purposes of this Agreement, the term "Confidential Data" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement.
11. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period he shall not directly or indirectly, on behalf of himself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency, induce or attempt to induce any person to leave the employ of the Company.
12. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during his employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "Developments"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "works made for hire" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such
Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement.
13. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 9, 10, 11 and 12 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant, except that failure by the Company to pay all amounts due under this Agreement within thirty (30) days after written notice from Employee shall constitute grounds for termination of Sections 9 and 11 of this Agreement.
14. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, be entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction. Furthermore, the Company shall, in addition to any other rights or remedies available to it, at law or otherwise, be entitled to reimbursement of court costs, attorneys' fees, and other expenses incurred as a result of a breach of this Agreement. The Employee agrees to reimburse the Company for such expenses promptly following a final determination that the Employee has breached this Agreement. In the event of a final determination that Employee has not breached this Agreement, the Company agrees to reimburse the Employee for his court costs and attorneys' fees promptly following such determination.
15. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of one year after termination of the Employee's employment for any reason.
16. NONCOMPETITION AREA.
(a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and additionally existing in Europe, particularly servicing France, Spain and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area:
(b) The State of North Carolina;
(c) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company;
(d) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and
(e) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company.
17. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to, (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, accounting or legal services for use by small businesses, whether for use by professionals or consumes; (ii) the business of development, marketing and operation of a business services Internet portal for use by small businesses, and other products or services related to any of the foregoing; (iii) providing web-hosted applications and technology infrastructure syndication and/or (iv) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing for. For purposes of the foregoing definition of "Business," a "small business" is any business enterprise with fewer than 100 employees and a "business services Internet portal" is a web site providing users with multiple online business resources covering broad topics for small businesses such as, for example only, marketing, financial management, legal, and business strategies using databases, online documents, reference material, chat rooms, newsgroups, hyperlinking or other information tools.
18. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina.
(b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision.
(c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision.
(e) This Agreement shall not be assignable without the written consent of the Company and the Employee.
(f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns.
(g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment agreement, understanding or arrangement between Company and the Employee.
19. This Agreement terminates the Employment Agreement dated July 14, 1999, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect.
IN WITNESS WHEREOF, the parties executed this Agreement under
seal as of the day and year first above written.
SMART ONLINE, INC.
Attest: By: _____________________________________
By: ___________________________ Name: ___________________________________
Corporate Secretary Title: __________________________________
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WITNESS: ______________________ EMPLOYEE: _________________________(SEAL)
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between Smart Online, Inc. a Delaware corporation (the "COMPANY"), and Henry Nouri (the "EMPLOYEE"), dated as of the 1st day of April, 2004.
WITNESSETH THAT
WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; and
WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and
WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and
WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's grant of options hereunder, employment of the Employee under the terms of this Agreement, and for other additional good and valuable consideration, the receipt and sufficiency of which are hereby conclusively acknowledged;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to the terms of this Agreement shall commence on June1, 2004, and shall terminate on the first to occur of (i) the termination of this Agreement as provided herein, or (ii) December 31, 2005; provided, however, that if neither party has given written notice to the other, at least one hundred eighty (180) days prior to the expiration date then in effect, of the intention not to renew the Agreement beyond such expiration date or the expiration date for any renewal period, then the term of this Agreement shall automatically extend for an additional two (2) years at the conclusion of the expiration date for the initial term or renewal period as applicable. The term during which this Agreement is in effect is referred to herein as the "EMPLOYMENT PERIOD."
2. POSITION AND DUTIES.
(a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as Executive Vice President of Product Development, with such
duties and responsibilities as are customarily assigned to such position, including, without limitation, managing the development and updating content for all applications, directing the evaluation of all applications, directing the beta-testing of products, directing the relational aspect of online applications to the rest of the Web site and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the President, Chief Executive Officer or the Board of Directors.
(b) During the Employment Period, the Employee shall devote his loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently.
3. COMPENSATION.
(a) Base Salary. The Employee's base salary initially shall be $150,000 per annum, payable monthly, which salary shall be evaluated annually and is subject to such increases as the Board of Directors of the Company approves (in either case, as applicable for such periods, "ANNUAL BASE SALARY").
(b) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company (including but not limited to disability, health, life and dental insurance) for which senior management employees are eligible generally.
(c) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes.
4. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "DISABILITY" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "DISABILITY EFFECTIVE DATE").
(b) By the Company.
(i) The Company may terminate the Employee's employment during the Employment Period for Cause or Without Cause. A termination of the Employee's employment with Cause shall be effective when communicated to the Employee by written notice. "CAUSE" means:
A. participation in a fraud or theft against the Company;
B. any chemical dependence which materially adversely affects the performance of his duties and responsibilities to the Company;
C. breach of Employee's fiduciary obligations to the Company in a material respect;
D. Employee repeatedly willfully fails to perform his duties after written notice with reasonable opportunity to cure;
E. material breach of the Company's policies or any material provision of this Agreement;
F. gross misconduct resulting in substantial loss to the Company or damage to the reputation of the Company; or
G. knowing material violation of securities laws, rules or regulations.
(ii) "WITHOUT CAUSE" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by written notice.
(c) By the Employee. The Employee may signify his intention
to terminate his employment at any time upon the giving of one hundred eighty
(180) days' notice ("NOTICE PERIOD") to the Company of his intent to do so. Upon
the expiration of the Notice Period the termination will be effective and the
Date of Termination will be effective as referred to below. The Company reserves
the right to accelerate the effective "Date of Termination" in its discretion
after the inception of the Notice Period.
(d) Date of Termination. The "DATE OF TERMINATION" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or Without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Termination by the Company without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as defined in Section 4(b) above) or if the Employee terminates his employment for Good Reason (as defined below) at any time during which the Employee does not directly, or indirectly through one or more intermediaries, control the Company:
(i) the Company shall pay the Employee the portion of his base salary in effect at the time of termination as he may be entitled to receive for services rendered prior to the date of such termination;
(ii) the Company shall pay the Employee for any accrued but unused vacation;
(iii) for a period of twelve (12) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee his base salary in effect at the time of his termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if he had remained employed by the Company pursuant to this Agreement during the entire such twelve (12) month period; and
(iv) the Company shall take all action necessary to provide that the all stock options held by the Employee shall become fully vested and exercisable, to the extent not already fully vested and exercisable, as of the date of such termination of employment.
For purposes of this Agreement, the Employee shall be deemed to have terminated his employment for "GOOD REASON" if he voluntarily terminates his employment with the Company under any of the following circumstances:
(i) any demotion or diminution in the Employee's position, title, reporting position or duties;
(ii) any reduction in the Employee's base salary;
(iii) failure to reelect Employee as a member of the Company's board of directors;
(iv) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or
(v) any material breach of this Agreement by the Company.
(b) Termination on Account of Death or Disability. If the
Company terminates the employment of the Employee on account of Disability (as
defined in Section 4(a) above) of the Employee, or in the event of the
Employee's death, the Company shall pay or provide to the Employee or his
beneficiary such compensation and benefits as are set forth in subsections
(a)(i), (a)(iii) and (a)(iv) above.
(c) Termination with Cause. If the Company terminates the employment of the Employee with Cause (as defined in Section 4(b) above), the Company shall pay the
Employee or his beneficiary such compensation as is set forth in subsections
(a)(i) and (a)(ii) above.
6. CHANGE IN CONTROL.
(a) If a Change in Control (as defined in subsection (b) below) occurs and, following the Change in Control either (i) Employee remains employed with the surviving entity for such period of time as shall be specified by the board of directors (or other governing body) of such surviving entity at the time of such Change in Control, (ii) Employee's employment is terminated by the Company without Cause, or (iii) Employee terminates his employment for Good Reason as described in Section 5(a), the Company shall make a lump sum payment to the Employee on the expiration date of the period of time referred to in clause (i) or the effective date of the termination referred to in clause (ii) or (iii), as applicable, of an amount equal to the lesser of (x) 2.99 times that highest amount of the annual cash compensation (including cash bonuses and other cash-based benefits, including for these purposes amounts earned or payable whether or not deferred) received from the Company during any of the five calendar years preceding such date and (y) the largest amount payable to the Employee that would not trigger an excise tax payable by the Employee pursuant to Section 280G of the Internal revenue Code of 1986, as amended. Such payment shall be in addition to the payments and benefits provided in Section 5 (a)(i), 5(a)(ii) and 5(a)(iv) but in lieu of any other salary or benefits under this Agreement.
(b) For purposes of this Agreement, a "CHANGE IN CONTROL" shall be deemed to have occurred on the earliest of the following dates:
(i) the date on which any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, thirty percent (30%) or more of the outstanding Common Stock of the Company (excluding for this purpose any person or entity beneficially owning more than 50% of the Common Stock of the Company as of the date hereof); or
(ii) the date the shareholders of the Company approve a definitive agreement to (A) merge or consolidate the Company with or into another corporation other than with respect to a merger or consolidation which would result in the voting securities of the Company beneficially owned by Employee immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation; (B) sell or otherwise dispose of all or substantially all of the assets of the Company; or (C) dissolve or liquidate the Company.
7. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish.
8. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that:
(a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and
(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability rendering him incapable of performing the essential functions involved in his anticipated duties or that would otherwise hinder the performance of duties under this Agreement.
9. COVENANT NOT TO COMPETE. The Employee covenants that during the "NONCOMPETITION PERIOD," as defined in paragraph 15, and within the "NONCOMPETITION AREA," as defined in paragraph 16, he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency (other than the Company) engage in the "BUSINESS," as defined in paragraph 17. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, he shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business.
10. NONDISCLOSURE COVENANT.
(a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "CONFIDENTIAL DATA"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that his relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) he shall keep and maintain the Confidential Data in strictest confidence, and (ii) he shall not, either directly or indirectly, use any Confidential Data for his own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will return to the Company all Company documents, notes, programs, data and any other materials (including any copies thereof) in his/her possession.
(b) For purposes of this Agreement, the term "CONFIDENTIAL DATA" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement.
11. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period he shall not directly or indirectly, on behalf of himself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency, induce or attempt to induce any person to leave the employ of the Company.
12. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during his employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "DEVELOPMENTS"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "WORKS MADE FOR HIRE" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets
with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement.
13. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 9, 10, 11 and 12 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant, except that failure by the Company to pay all amounts due under this Agreement within thirty (30) days after written notice from Employee shall constitute grounds for termination of Sections 9 and 12 of this Agreement.
14. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, be entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction. Furthermore, the Company shall, in addition to any other rights or remedies available to it, at law or otherwise, be entitled to reimbursement of court costs, attorneys' fees, and other expenses incurred as a result of a breach of this Agreement. The Employee agrees to reimburse the Company for such expenses promptly following a final determination that the Employee has breached this Agreement. In the event of a final determination that Employee has not breached this Agreement, the Company agrees to reimburse the Employee for his court costs and attorneys' fees promptly following such determination.
15. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of one year after termination of the Employee's employment for any reason.
16. NONCOMPETITION AREA.
(a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and
additionally existing in Europe, particularly servicing France, Spain and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area:
(b) The State of North Carolina;
(c) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company;
(d) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and
(e) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company.
17. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to, (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, accounting or legal services for use by small businesses, whether for use by professionals or consumes; (ii) the business of development, marketing and operation of a business services Internet portal for use by small businesses, and other products or services related to any of the foregoing; (iii) providing web-hosted applications and technology infrastructure syndication and/or (iv) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing for. For purposes of the foregoing definition of "Business," a "SMALL BUSINESS" is any business enterprise with fewer than 100 employees and a "BUSINESS SERVICES INTERNET PORTAL" is a web site providing users with multiple online business resources covering broad topics for small businesses such as, for example only, marketing, financial management, legal, and business strategies using databases, online documents, reference material, chat rooms, newsgroups, hyperlinking or other information tools.
18. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina.
(b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision.
(c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision.
(e) This Agreement shall not be assignable without the written consent of the Company and the Employee.
(f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns.
(g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment agreement, understanding or arrangement between Company and the Employee.
19. This Agreement terminates the Employment Agreement dated July 14, 1999, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect.
IN WITNESS WHEREOF, the parties executed this Agreement under
seal as of the day and year first above written.
SMART ONLINE, INC.
Attest: By: _____________________________________
By: ___________________________ Name: ___________________________________
Corporate Secretary Title: __________________________________
|
WITNESS: ______________________ EMPLOYEE: _________________________(SEAL)
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between Smart Online, Inc. a Delaware corporation (the "Company"), and Ronna Loprete (the "Employee"), dated as of the 1st day of April, 2004.
WITNESSETH THAT
WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement; and
WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and
WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and
WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's grant of options hereunder, employment of the Employee under the terms of this Agreement, and for other additional good and valuable consideration, the receipt and sufficiency of which are hereby conclusively acknowledged;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to the terms of this Agreement shall commence on June 1, 2004, and shall terminate on the first to occur of (i) the termination of this Agreement as provided herein, or (ii) December 31, 2005; provided, however, that if neither party has given written notice to the other, at least thirty (30) days prior to the expiration date then in effect, of the intention not to renew the Agreement beyond such expiration date, then the term of this Agreement shall automatically extend for an additional one (1) year at the conclusion of such expiration date. The term during which this Agreement is in effect is referred to herein as the "Employment Period."
2. POSITION AND DUTIES.
(a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as Vice President of Administration and Secretary, with such duties and responsibilities as are customarily assigned to such position, including, without limitation, all human resources planning and administration, general contract administration and such other
duties and responsibilities not inconsistent therewith as may from time to time be assigned to her by the President, Chief Executive Officer or the Board of Directors.
(b) During the Employment Period, the Employee shall devote her loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently.
(c) The Employee shall supervise and manage the Company's worldwide operations and activities.
3. COMPENSATION.
(a) Base Salary. The Employee's base salary shall be $120,000 per annum, payable monthly, which salary shall be reevaluated annually and is subject to such increases as the Board of Directors approves. The term "Annual Base Salary" shall refer to the base salary prevailing during the applicable period until such time of any increase in base salary whereupon it shall thereafter refer to such increased amount.
(b) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company (including but not limited to disability, health, life and dental insurance) for which senior management employees are eligible generally.
(c) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes.
4. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "Disability Effective Date").
(b) By the Company.
(i) The Company may terminate the Employee's employment at any time during the Employment Period for Cause or Without Cause. A termination of the Employee's employment with Cause shall be effective when communicated
to the Employee by verbal or written notice. "Cause" means unacceptable conduct, including:
A. participation in a fraud or act of dishonesty against the Company;
B. any chemical dependence which affects the performance of her duties and responsibilities to the Company;
C. breach of Employee's fiduciary obligations to the Company;
D. Employee willfully fails to perform her duties;
E. breach of the Company's policies or any material provision of this Agreement;
F. misconduct resulting in loss to the Company or damage to the reputation of the Company; or
G. conduct by the Employee which, in the determination of the Company's Board of Directors, demonstrates unfitness to serve.
(ii) "Without Cause" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by verbal or written notice.
(c) By the Employee. The Employee may signify her intention to terminate her employment at any time upon the giving of sixty (60) days' notice ("Notice Period") to the Company of her intent to do so. Upon the expiration of the Notice Period the termination will be effective and the Date of Termination will be effective as referred to below. The Company reserves the right to accelerate the effective "Date of Termination" in its discretion after the inception of the Notice Period.
(d) Date of Termination. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or Without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Termination by the Company Without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as
defined in Section 4(b) above) or if the Employee terminates her employment for Good Reason (as defined below):
(i) the Company shall pay the Employee the portion of her base salary in effect at the time of termination as she may be entitled to receive for services rendered prior to the date of such termination;
(ii) the Company shall pay the Employee for any accrued but unused vacation;
(iii) for a period of three (3) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee her base salary in effect at the time of her termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if she had remained employed by the Company pursuant to this Agreement during the entire such three (3) month period; and
(iv) the Company shall take all action necessary to provide that the all stock options held by the Employee shall become fully vested and exercisable, to the extent not already fully vested and exercisable, as of the date of such termination of employment.
For purposes of this Agreement, the Employee shall be deemed to have terminated her employment for "Good Reason" if she voluntarily terminates her employment with the Company under any of the following circumstances:
(i) any demotion or diminution in the Employee's position, title, reporting position or duties;
(ii) any reduction in the Employee's base salary;
(iii) failure to reelect Employee as a member of the Company's board of directors;
(iv) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or
(v) any material breach of this Agreement by the Company.
(b) Termination on Account of Death or Disability. If the
Company terminates the employment of the Employee on account of Disability (as
defined in Section 4(a) above) of the Employee, or in the event of the
Employee's death, the Company shall pay or provide to the Employee or her
beneficiary such compensation and benefits as are set forth in subsections
(a)(i), (a)(iii) and (a)(iv) above.
(c) Termination with Cause. If the Company terminates the employment of the Employee with Cause (as defined in Section 4(b) above), the Company shall pay the Employee or her beneficiary such compensation as is set forth in subsections (a)(i) and (a)(ii) above.
6. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish.
7. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that:
(a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and
(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability rendering her incapable of performing the essential functions involved in her anticipated duties or that would otherwise hinder the performance of duties under this Agreement.
8. COVENANT NOT TO COMPETE. The Employee covenants that during the "Noncompetition Period," as defined in paragraph 14, and within the "Noncompetition Area," as defined in paragraph 15, she shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency (other than the Company) engage in the "Business," as defined in paragraph 16. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, she shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business.
9. NONDISCLOSURE COVENANT.
(a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "Confidential Data"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that her relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) she shall keep and maintain the Confidential Data in strictest confidence, and (ii) she shall not, either directly or indirectly, use any Confidential Data for her own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a
need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will return to the Company all Company documents, notes, programs, data and any other materials (including any copies thereof) in her possession.
(b) For purposes of this Agreement, the term "Confidential Data" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement.
10. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period she shall not directly or indirectly, on behalf of herself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period she shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency, induce or attempt to induce any person to leave the employ of the Company.
11. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during her employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "Developments"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "works made for hire" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such
Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement.
12. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 8, 9, 10, and 11 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant.
13. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, be entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction. Furthermore, the Company shall, in addition to any other rights or remedies available to it, at law or otherwise, be entitled to reimbursement of court costs, attorneys' fees, and other expenses incurred as a result of a breach of this Agreement. The Employee agrees to reimburse the Company for such expenses promptly following a final determination that the Employee has breached this Agreement. In the event of a final determination that Employee has not breached this Agreement, the Company agrees to reimburse the Employee for her court costs and attorneys' fees promptly following such determination.
14. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of one year after termination of
the Employee's employment for any reason (such period not to include any period(s) of violation or period(s) of time required for litigation to enforce the covenants set forth herein).
15. NONCOMPETITION AREA.
(a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and additionally existing in Europe, particularly servicing France, Spain and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area:
(b) The State of North Carolina;
(c) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company;
(d) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and
(e) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company.
16. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to: (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, legal services, whether for use by professionals or consumers; (ii) providing web-hosted applications and technology infrastructure syndication and/or (iii) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing to enter.
17. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina.
(b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision.
(c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision.
(e) This Agreement shall not be assignable without the written consent of the Company and the Employee.
(f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns.
(g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment agreement, understanding or arrangement between Company and the Employee.
18. This Agreement terminates the Employment Agreement dated June 29, 1999, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect.
IN WITNESS WHEREOF, the parties executed this Agreement under seal as of the day and year first above written.
SMART ONLINE, INC.
By:__________________________________
Title:_______________________________
WITNESS: ______________________ EMPLOYEE: ___________________________
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Smart Online, Inc. a Delaware corporation (the "Company"), and Jose Collazo (the "Employee"), dated as of the 1st day of May, 2004.
WITNESSETH THAT
WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement;
WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and
WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and
WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's commitment to continue to employ the Employee and for other additional consideration agreed to between the parties;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to this Agreement shall commence on the date hereof and, unless earlier terminated as hereinafter provided, shall continue for an initial period through December 31, 2005. The Company may extend the period of employment of the Employee pursuant to this Agreement for additional periods of up to one (1) year for each extension by written notice to the Employee given not less than ninety (90) days prior to the expiration of the initial period or any renewal period. The period of employment of Employee hereunder shall be hereinafter referred to as the Employment Period.
2. POSITION AND DUTIES.
(a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as Vice President, Internet Development, with such duties and responsibilities as are customarily assigned to such position and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the President, Chief Executive Officer or Board of Directors.
(b) During the Employment Period, the Employee shall devote his loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently.
(c) The Employee's services shall be performed primarily at the Company's headquarters in Durham, North Carolina.
3. COMPENSATION.
(a) Base Salary. The Employee's base salary shall be $100,000 per annum, payable monthly, which salary shall be reevaluated annually and is subject to such increases as the Board of Directors approves. Effective June 1, 2004 Employee's base salary shall be $120,000 per annum. The term "Annual Base Salary" shall refer to the base salary prevailing during the applicable period until such time of any increase in base salary whereupon it shall thereafter refer to such increased amount.
(b) Stock Options. The Company and the Employee shall execute a Stock Option Agreement dated as of May 1, 2004 whereby the Company grants options to purchase an aggregate of 75,000 shares of the Company's Class Common Stock pursuant to the Company's 2004 Equity Compensation Plan.
(c) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company for which senior management employees are eligible generally.
(d) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes.
4. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "Disability Effective Date").
(b) By the Company.
(i) The Company may terminate the Employee's employment at any time during the Employment Period for Cause or without Cause. A termination of
the Employee's employment with Cause shall be effective when communicated to the Employee by verbal or written notice. "Cause" means unacceptable conduct, including:
A. participation in a fraud or act of dishonesty against the Company;
B. any chemical dependence which affects the performance of his duties and responsibilities to the Company;
C. breach of Employee's fiduciary obligations to the Company;
D. Employee willfully fails to perform his duties;
E. breach of the Company's policies or any material provision of this Agreement;
F. misconduct resulting in loss to the Company or damage to the reputation of the Company; or
G. conduct by the Employee which, in the determination of the Company's Board of Directors, demonstrates unfitness to serve.
(ii) "Without cause" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by verbal or written notice.
(c) By the Employee. The Employee may signify his intention to terminate his employment at any time upon the giving of ninety (90) days' notice ("Notice Period") to the Company of his intent to do so. Upon the expiration of the Notice Period the termination will be effective and the Date of Termination will be effective as referred to below. The Company reserves the right to accelerate the effective "Date of Termination" in its discretion after the inception of the Notice Period.
(d) Date of Termination. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Termination by the Company Without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as
defined in Section 4(b) above) or if the Employee terminates her employment for Good Reason (as defined below):
(i) the Company shall pay the Employee the portion of his base salary in termination as he may be entitled to receive for services rendered prior to the date of such termination;
(ii) for a period of three (3) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee her base salary in effect at the time of her termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if she had remained employed by the Company pursuant to this Agreement during the entire such three (3) month period; and
For purposes of this Agreement, the Employee shall be deemed to have terminated her employment for "Good Reason" if she voluntarily terminates his employment with the Company under any of the following circumstances:
(i) any demotion or diminution in the Employee's position, title, reporting position or duties;
(ii) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or
(iii) any material breach of this Agreement by the Company.
(b) By the Company for Cause; By the Employee; Death or Disability. If the Employee's employment is terminated by the Company for Cause during the Employment Period, if Employee terminates employment during the Employment Period or if the Employee's employment is terminated by reason of the Employee's death or disability during the Employment Period, the Company shall pay the Employee the Annual Base Salary (then in effect) through the Date of Termination and the Company shall have no further obligations under this Agreement.
6. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish.
7. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that:
(a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and
(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability which will render him incapable of performing the essential functions involved in his anticipated duties or that would otherwise hinder the performance of duties under this Agreement.
8. COVENANT NOT TO COMPETE. The Employee covenants that during the "Noncompetition Period," as defined in paragraph 14, and within the "Noncompetition Area," as defined in paragraph 15, he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency engage in the "Business," as defined in paragraph 16. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, he shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business.
9. NONDISCLOSURE COVENANT.
(a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "Confidential Data"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that his relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) he shall keep and maintain the Confidential Data in strictest confidence, and (ii) he shall not, either directly or indirectly, use any Confidential Data for his own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will return to the Company all documents, notes, programs, data and any other materials (including any copies thereof) in his/her possession.
(b) For purposes of this Agreement, the term "Confidential Data" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United
States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement.
10. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period he shall not directly or indirectly, on behalf of himself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity, solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period he shall not induce or attempt to induce any person to leave the employ of the Company.
11. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during his employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "Developments"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "works made for hire" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement.
12. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 8, 9, 10, and 11 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant.
13. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, by entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction.
14. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of two years after termination of the Employee's employment for any reason (such period not to include any period(s) of violation or period(s) of time required for litigation to enforce the covenants set forth herein).
15. NONCOMPETITION AREA.
(a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and additionally existing in Europe, particularly servicing France, Spain, the United Kingdon and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area:
(i) The State of North Carolina;
(ii) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company;
(iii) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and
(iv) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company.
16. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to: (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, legal services, whether for use by professionals or consumers; (ii) providing web-hosted applications and technology infrastructure syndication and/or (iii) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing to enter.
17. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina.
(b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision.
(c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision.
(e) This Agreement shall not be assignable without the written consent of the Company and the Employee.
(f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns.
(g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment Agreement, understanding or arrangement between Company and the Employee.
18. This Agreement terminates the Employment Agreement dated August 1, 2000, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect.
IN WITNESS WHEREOF, the parties executed this Agreement as of the day and year first above written.
SMART ONLINE, INC.
By:____________________________________
Title:_________________________________
WITNESS: ______________________ EMPLOYEE: _____________________________
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Smart Online, Inc. a Delaware corporation (the "Company"), and Anil Kamath (the "Employee"), dated as of the 1st day of May, 2004.
WITNESSETH THAT
WHEREAS, the Company and the Employee wish to contract for the employment by the Company of the Employee, and the Employee wishes to serve the Company, in the capacities and on the terms and conditions set forth in this Agreement;
WHEREAS, the Company is an enterprise whose success is attributable largely to the creation and maintenance of certain Confidential Data (as defined below) and during the period of employment the Employee will be situated to have access to and be knowledgeable with respect to the Confidential Data as well as the customers of the Company; and
WHEREAS, Company has a legitimate protectible business interest in the creation and maintenance of its Confidential Data and the protection of the identity of, and related information concerning, its customers and the Company's customer lists; and
WHEREAS, the Company wishes to protect its Confidential Data from disclosure by the Employee by means of the restrictive covenants contained in this Agreement and the Employee agrees to such covenants in exchange for the Company's commitment to continue to employ the Employee and for other additional consideration agreed to between the parties;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Employee, and the Employee shall serve the Company, on the terms and conditions set forth in this Agreement. Such employment pursuant to this Agreement shall commence on the date hereof and, unless earlier terminated as hereinafter provided, shall continue for an initial period through December 31, 2005. The Company may extend the period of employment of the Employee pursuant to this Agreement for additional periods of up to one (1) year for each extension by written notice to the Employee given not less than ninety (90) days prior to the expiration of the initial period or any renewal period. The period of employment of Employee hereunder shall be hereinafter referred to as the Employment Period.
2. POSITION AND DUTIES.
(a) During the Employment Period, the Employee shall serve as a full-time employee of the Company as Vice President, Technology, with such duties and responsibilities as are customarily assigned to such position and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the President, Chief Executive Officer or Board of Directors.
(b) During the Employment Period, the Employee shall devote his loyalty, attention, and time to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee under this Agreement, use the Employee's best efforts to carry out such responsibilities faithfully and efficiently.
(c) The Employee's services shall be performed primarily at the Company's headquarters in Durham, North Carolina.
3. COMPENSATION.
(a) Base Salary. The Employee's base salary shall be $100,000 per annum, payable monthly, which salary shall be reevaluated annually and is subject to such increases as the Board of Directors approves. Effective June 1, 2004 Employee's base salary shall be $125,000 per annum. The term "Annual Base Salary" shall refer to the base salary prevailing during the applicable period until such time of any increase in base salary whereupon it shall thereafter refer to such increased amount.
(b) Stock Options. The Company and the Employee shall execute a Stock Option Agreement dated as of May 1, 2004 whereby the Company grants options to purchase an aggregate of 75,000 shares of the Company's Class Common Stock pursuant to the Company's 2004 Equity Compensation Plan.
(c) Other Benefits. In addition, during the Employment Period the Employee shall be entitled to participate, in accordance with the relevant provisions thereof, in all applicable incentive, savings, and retirement plans, practices, policies, and programs of the Company for which senior management employees are eligible generally.
(d) All compensation hereunder shall be subject to all applicable federal and state withholding, payroll and other taxes.
4. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. The Employee's employment shall terminate automatically upon the Employee's death during the Employment Period. The Company shall be entitled to terminate the Employee's employment because of the Employee's Disability during the Employment Period. "Disability" means that the Employee has been unable, for a period of thirty (30) consecutive calendar days, to perform the Employee's duties under this Agreement, as a result of physical or mental illness or injury. A termination of the Employee's employment by the Company for Disability shall be communicated to the Employee by written notice, and shall be effective on the date of receipt of such notice by the Employee (the "Disability Effective Date").
(b) By the Company.
(i) The Company may terminate the Employee's employment at any time during the Employment Period for Cause or without Cause. A termination of
the Employee's employment with Cause shall be effective when communicated to the Employee by written or verbal notice. "Cause" means unacceptable conduct, including:
A. participation in a fraud or act of dishonesty against the Company;
B. any chemical dependence which affects the performance of his duties and responsibilities to the Company;
C. breach of Employee's fiduciary obligations to the Company;
D. Employee willfully fails to perform his duties;
E. breach of the Company's policies or any material provision of this Agreement;
F. misconduct resulting in loss to the Company or damage to the reputation of the Company; or
G. conduct by the Employee which, in the determination of the Company's Board of Directors, demonstrates unfitness to serve.
(ii) "Without cause" means termination of Employee's employment for some reason other than that listed in Paragraph 4(b)(i) above. A termination of the Employee's employment Without Cause shall be effective when communicated to the Employee by written or verbal notice.
(c) By the Employee. The Employee may signify his intention to terminate his employment at any time upon the giving of ninety (90) days' notice ("Notice Period") to the Company of his intent to do so. Upon the expiration of the Notice Period the termination will be effective and the Date of Termination will be effective as referred to below. The Company reserves the right to accelerate the effective "Date of Termination" in its discretion after the inception of the Notice Period.
(d) Date of Termination. The "Date of Termination" means the date of the Employee's death, the Disability Effective Date, the date on which the termination of the Employee's employment by the Company for Cause or without Cause is effective, or the date on which the termination of the Employee's employment by the Employee is effective, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) Termination by the Company Without Cause or by the Employee for Good Reason. If the Company terminates the employment of the Employee without Cause (as
defined in Section 4(b) above) or if the Employee terminates her employment for Good Reason (as defined below):
(i) the Company shall pay the Employee the portion of his base salary in termination as he may be entitled to receive for services rendered prior to the date of such termination;
(ii) for a period of three (3) months following the date on which the Employee's employment with the Company terminates, the Company shall continue to pay the Employee her base salary in effect at the time of her termination of employment and shall continue to provide the Employee with all benefits specified in this Agreement, with no adverse tax consequences to the Employee, as if she had remained employed by the Company pursuant to this Agreement during the entire such three (3) month period; and
For purposes of this Agreement, the Employee shall be deemed to have terminated her employment for "Good Reason" if she voluntarily terminates his employment with the Company under any of the following circumstances:
(i) any demotion or diminution in the Employee's position, title, reporting position or duties;
(ii) relocation of the Employee's office to a location more than thirty (30) miles outside of Research Triangle Park, North Carolina; or
(iii) any material breach of this Agreement by the Company.
(b) By the Company for Cause; By the Employee; Death or Disability. If the Employee's employment is terminated by the Company for Cause during the Employment Period, if Employee terminates employment during the Employment Period or if the Employee's employment is terminated by reason of the Employee's death or disability during the Employment Period, the Company shall pay the Employee the Annual Base Salary (then in effect) through the Date of Termination and the Company shall have no further obligations under this Agreement.
6. EXPENSES. The Company agrees to reimburse the Employee for reasonable and necessary expenses incurred by the Employee in the furtherance of the Company's business in accordance with such procedures as the Company may from time to time establish.
7. REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE. The Employee represents and warrants that:
(a) the Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of duties hereunder or other rights of the Company hereunder; and
(b) to the best of the Employee's knowledge, the Employee is under no physical or mental disability which will render him incapable of performing the essential functions involved in his anticipated duties or that would otherwise hinder the performance of duties under this Agreement.
8. COVENANT NOT TO COMPETE. The Employee covenants that during the "Noncompetition Period," as defined in paragraph 14, and within the "Noncompetition Area," as defined in paragraph 15, he shall not, directly or indirectly, as principal, agent, consultant, trustee or through the agency of any corporation, partnership, association, or agency engage in the "Business," as defined in paragraph 16. Specifically, but without limiting the foregoing, the Employee agrees that during such period and within such area, he shall not do any of the following: (a) be the owner of the outstanding capital stock of any corporation which conducts a business of a like or similar nature to the "Business" (other than stock of a corporation traded on a national securities exchange or automated quotation system); (b) be an officer or director of any corporation which conducts a business of a like or similar nature to the "Business"; (c) be a member of any partnership which conducts a business of a like or similar nature to the "Business"; or (d) be a consultant to, an owner of or an employee of any other business which conducts a business of a like or similar nature to the Business.
9. NONDISCLOSURE COVENANT.
(a) The parties acknowledge that the Company is an enterprise whose success is attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (the "Confidential Data"), and that the Employee's employment with the Company will involve the Employee's access to and work with such information. The Employee acknowledges that his relationship with the Company is a confidential relationship. The Employee covenants and agrees that (i) he shall keep and maintain the Confidential Data in strictest confidence, and (ii) he shall not, either directly or indirectly, use any Confidential Data for his own benefit, or divulge, disclose, or communicate any Confidential Data in any manner whatsoever to any person or entity other than the employees or agents of the Company having a need to know such Confidential Data, and only to the extent necessary to perform their responsibilities on behalf of the Company, and other than in the performance of the Employee's duties in the employment by the Company. The Employee's agreement not to disclose Confidential Data shall apply to all Confidential Data, whether or not the Employee participated in the development thereof. Upon termination of employment for any reason, the Employee will return to the Company all documents, notes, programs, data and any other materials (including any copies thereof) in his/her possession.
(b) For purposes of this Agreement, the term "Confidential Data" shall include any and all information related to the business of the Company, or to its products, sales or businesses which is not general public knowledge, specifically including (but without limiting the generality of the foregoing) all financial and accounting data; computer software; processes; formulae; inventions; methods; trade secrets; computer programs; engineering or technical data, drawings, or designs; manufacturing techniques; patents, patent applications, copyrights and copyright applications (in any such case, whether registered or to be registered in the United
States of America or elsewhere) applied for, issued to or owned by the Company; information concerning pricing and pricing policies; marketing techniques; suppliers; methods and manner of operations; and information relating to the identity, needs and location of all past, present and prospective customers. The parties stipulate that as between them the above-described matters are important and confidential and gravely affect the successful conduct of the business of the Company and that any breach of the terms of this paragraph shall be a material breach of this Agreement.
10. NONSOLICITATION COVENANT. The Employee covenants that during the Noncompetition Period he shall not directly or indirectly, on behalf of himself or on behalf of any other person, firm, partnership, corporation, association or other entity, call upon any of the customers or clients of the Company for the purpose of soliciting or providing any product or service similar to that provided by the Company nor will he, in any way, directly or indirectly, for himself, or on behalf of any other person, firm, partnership, corporation, association, or other entity, solicit, divert or take away, or attempt to solicit, divert, or take away any of the customers, clients, business, or patrons of the Company. The Employee further covenants that during the Noncompetition Period he shall not induce or attempt to induce any person to leave the employ of the Company.
11. INVENTIONS. All inventions, designs, improvements and developments made by the Employee, either solely or in collaboration with others, during his employment with the Company, whether or not during working hours, and relating to any methods, apparatus or products which are manufactured, sold, leased, used or developed by the Company or which pertain to the Business (the "Developments"), shall become and remain the property of the Company. The Employee shall disclose promptly in writing to the Company all such Developments. The Employee acknowledges and agrees that all Developments shall be deemed "works made for hire" within the meaning of the United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, the Employee shall assign, and hereby assigns, to the Company, all of the Employee's right, title and interest (including, but not limited to, copyright and all rights of inventorship) in and to such Developments. At the request and expense of the Company, whether during or after employment hereunder, the Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to be performed such other lawful acts as the Company may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such Developments or in vesting in the Company full legal title to such Developments. The Employee shall assist and cooperate with the Company or its representatives in any controversy or legal proceeding relating to such Developments, or to any patents, copyrights or trade secrets with respect thereto. If for any reason the Employee refuses or is unable to assist the Company in obtaining or enforcing its rights with respect to such Developments, the Employee hereby irrevocably designates and appoints the Company and its duly authorized agents as the Employee's agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect the Company's rights in the Developments. The Employee expressly acknowledges that the special foregoing power of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) the Employee's death or incompetency and (ii) any termination of this Agreement.
12. INDEPENDENT COVENANTS. Each of the covenants on the part of the Employee contained in paragraphs 8, 9, 10, and 11 of this Agreement shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any such covenant.
13. REASONABLENESS; INJUNCTION. The Employee acknowledges that the covenants contained in this agreement are reasonably necessary and designed for the protection of the Company and its business, and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof, the geographic area thereof, the scope thereof and the effect thereof on the Employee and the general public. The Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage the Company, and by reason thereof the Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, the Company shall, in addition to any other rights and remedies available to it, at law or otherwise, by entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation or threatened violation of this Agreement. The Employee consents to the issuance of such injunction.
14. NONCOMPETITION PERIOD. This Agreement shall remain enforceable during the Employee's employment with the Company and for a period of two years after termination of the Employee's employment for any reason (such period not to include any period(s) of violation or period(s) of time required for litigation to enforce the covenants set forth herein).
15. NONCOMPETITION AREA.
(a) The Employee acknowledges and agrees that the Company does business on an international basis and that the Employee will assist Company in developing Company's business in both the United States and Europe, with customers throughout the United States and additionally existing in Europe, particularly servicing France, Spain, the United Kingdon and Germany, and that any breach of the Employee's covenants contained herein would materially damage the Company, regardless of the area of the world in which the activities constituting such breach were to occur. Accordingly, the terms and provisions of this Agreement shall apply in the following Noncompetition Area:
(i) The State of North Carolina;
(ii) Any state other than North Carolina where Company conducts the "Business" and in or for which the Employee assists or performs services assisting Company;
(iii) Any political subdivision of foreign countries where Company does "Business" or will do "Business" during the period of employment; and
(iv) Any other state, country, or political subdivision where Company does "Business" and in or for which the Employee assists or performs services assisting Company.
16. BUSINESS. For the purposes of this Agreement, the "Business" shall include any business, service, or product engaged in, provided, or produced by the Company from the date of this Agreement to the date of the termination of the employment, including, but not limited to: (i) the business of development, production, marketing, design, manufacturing, leasing or selling software related to business plans, legal services, whether for use by professionals or consumers; (ii) providing web-hosted applications and technology infrastructure syndication and/or (iii) any other business conducted by the Company immediately prior to the date of termination of Employee's employment or in which the Company shall at the time of termination of Employee's employment with the Company be actively preparing to enter.
17. MISCELLANEOUS.
(a) This Agreement shall be subject to and governed by the substantive laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof. The Employee hereby submits to the jurisdiction and venue of the state and federal courts of North Carolina.
(b) The Company's failure to insist upon strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision.
(c) This Agreement may not be modified except by an agreement in writing executed by the parties. The parties expressly waive their right to orally modify this provision.
(d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision.
(e) This Agreement shall not be assignable without the written consent of the Company and the Employee.
(f) This Agreement shall inure to the benefit of and be binding upon the Company and it successors and assigns.
(g) This Agreement expresses the whole and entire Employment Agreement between the parties and supersedes and replaces any prior employment Agreement, understanding or arrangement between Company and the Employee.
18. This Agreement terminates the Employment Agreement dated October 16, 2000, as amended to date. Except for that agreement, all other agreements between the Company and Employee remain in full force and effect.
IN WITNESS WHEREOF, the parties executed this Agreement as of the day and year first above written.
SMART ONLINE, INC.
By:____________________________________
Title:_________________________________
WITNESS: ______________________ EMPLOYEE: _____________________________
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of October 13, 2003 (this "SECURITY AGREEMENT"), is entered into by Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713 (the "DEBTOR") in favor of the persons listed on SCHEDULE A hereto, ("SECURED PARTIES"), and such other persons as may become Secured Parties of secured obligations as described herein.
W I T N E S S E T H
WHEREAS, Secured Parties have agreed to allow Debtor to defer certain payments owed to the Secured Parties pursuant to certain outstanding loans and employment agreements and in exchange Debtor has agreed to issue to the Secured Parties certain promissory notes dated October 13, 2003 (the "PROMISSORY NOTES") by Debtor in favor of Secured Parties, which agreements are evidenced by certain Deferred Compensation Agreements and certain Loan and Settlement Agreements, each of which are listed on SCHEDULE A hereto; and
WHEREAS, in order to induce Secured Parties to make the loans under the Promissory Notes, Debtor has agreed to enter into this Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Debtor and Secured Parties hereby agree as follows:
1. DEFINITIONS. The following terms when used in this Security Agreement shall have the meanings set forth below:
1.1 "SECURED COLLATERAL" shall mean all tangible and intangible property of Debtor of any kind, whether now owned or existing or hereafter acquired, including, without limitation: (a) all equipment in all of its forms of Debtor, wherever located, and all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefore (all of the foregoing being "EQUIPMENT"); (b) all inventory in all of its forms of Debtor, wherever located, including all accessions thereto, products thereof and documents therefore (all of the foregoing being "INVENTORY"); (c) all accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles of Debtor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of Debtor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles; (d) all books, records, writings, databases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing; (e) all software programs (including both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by Debtor, all firmware associated therewith; all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such software and firmware described in the preceding clauses; and all rights with respect to all of the foregoing, including, without limitation, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing; (f) all intellectual property of Debtor, including, without limitation,
all inventions, whether patentable or not, trade secrets, patents, trademarks,
service marks, applications for patents, trademarks and service marks,
copyrights (registered and unregistered), software, including both object and
source code, all names and domain names, telephone numbers and email addresses;
(g) all of Debtor's other property and rights of every kind and description and
interests therein; and (h) all products, rents, issues, profits, returns, income
and proceeds of and from any and all of the foregoing, including, without
limitation, all payments under insurance, or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing.
1.2 "SECURED OBLIGATIONS" shall mean all obligations of Debtor now or hereafter existing under the Loan Documents, whether for principal, interest, costs, fees, expenses or otherwise, and all other obligations of Debtor to the Secured Parties under any other agreement, whether existing now or arising in the future.
1.3 "LOAN DOCUMENTS" shall mean this Security Agreement and the Promissory Notes and other agreements listed on SCHEDULE A hereto.
1.4 "SECURED PARTIES" shall mean both the Secured Parties set forth above and any person that becomes a Secured Parties of any Note in accordance with the provisions of the Loan Documents.
1.5 "UNIFORM COMMERCIAL CODE" shall mean the Uniform Commercial Code as in effect in the State of North Carolina or other applicable jurisdiction.
1.6 Other terms used in this Agreement that are defined in the Uniform Commercial Code shall have the meanings set forth in such code.
2. GRANT OF SECURITY INTEREST.
2.1 GRANT. Debtor hereby assigns and pledges to the Secured Parties, and hereby grants to the Secured Parties a first priority security interest in, all of the Secured Collateral.
2.2 SECURITY FOR OBLIGATIONS. This Security Agreement secures the payment of all Secured Obligations.
2.3 CONTINUING SECURITY INTEREST; TRANSFER OF NOTES. This Security Agreement shall create a continuing security interest in the Secured Collateral and shall (a) remain in full force and effect until payment in full of all Secured Obligations; (b) be binding upon Debtor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Secured Parties hereunder, to the benefit of the Secured Parties and its successors, transferees and assigns. Without limiting the generality of this clause, Secured Parties may sell, assign, or otherwise transfer (in whole or in part) the Promissory Notes to any other person, and such other person shall thereupon become vested with all the rights and benefits in respect thereof granted to the Secured Parties under this Security Agreement.
2.4 DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding Debtor shall remain liable under the contracts and agreements included in the Secured Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed. The exercise by Secured Parties of any rights hereunder shall not release Debtor from any of its duties or obligations under any such contracts or agreements included in the Secured Collateral. The Secured Parties shall not have any
obligation or liability under any such contracts or agreements included in the Secured Collateral by reason of this Security Agreement, nor shall the Secured Parties be obligated to perform any of the obligations or duties of Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder by reason of this Security Agreement.
2.5 SECURITY INTEREST ABSOLUTE. All rights of the Secured Parties
and the security interests granted to the Secured Parties hereunder, and all
obligations of Debtor hereunder, shall be absolute and unconditional,
irrespective of: (a) the failure of Secured Parties to assert any claim or
demand or to enforce any right or remedy against Debtor or to exercise any right
or remedy against any other guarantor of, or Secured Collateral security for,
any Secured Obligations; (b) any change in the time, manner or place of payment
of, or in any other term of, all or any of the Secured Obligations or any other
extension, compromise or renewal of any Secured Obligation; (c) any reduction,
limitation, impairment or termination of any Secured Obligations for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to (and Debtor hereby waives any right to or claim of) any
defense or setoff, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality, nongenuineness, irregularity, compromise,
unenforceability of, or any other event or occurrence affect, any Secured
Obligations; (d) any amendment to, rescission, waiver, or other modification of,
or any consent to departure from, any of the terms of any Loan Document; (e) any
addition, exchange, release, surrender or nonperfection of any Secured
Collateral, or any amendment to or waiver or release of or addition to or
consent to departure from any guaranty, for any of the Secured Obligations, or
(f) any other circumstances which might otherwise constitute a defense available
to, or a legal or equitable discharge of, Debtor, any surety or any guarantor.
2.6 FURTHER ASSURANCES. Debtor agrees that, from time to time and at its own expense, Debtor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Secured Parties may reasonably request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to exercise and enforce their rights and remedies hereunder with respect to any Secured Collateral, including any patent, trademark, service mark, copyright, or other intellectual property. With respect to the foregoing and the grant of the security interest hereunder, Debtor hereby authorizes the Secured Parties to file one or more financing or continuation statements, and amendments thereto and other documents Secured Parties determines is useful, relative to all or any part of the Secured Collateral without the signature of Debtor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Secured Collateral or any part thereof shall be sufficient as a financing statement where permitted by law.
2.7 TERMINATION. Upon the payment in full of all Secured Obligations, the security interest granted herein shall terminate and all rights to the Secured Collateral shall revert to Debtor. Upon any such termination, the Secured Parties will, at Debtor's sole expense, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination.
3. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants unto the Secured Parties as follows:
3.1 LOCATION OF OFFICE AND SECURED COLLATERAL. The place of business and chief executive office of Debtor and the office where Debtor keeps its records concerning the Secured Collateral is
located at the address above. All of the Secured Collateral is and will continue to be located at such place.
3.2 OWNERSHIP; NO LIENS. Debtor owns the Secured Collateral free and clear of any lien, security interest, charge or encumbrance except a security interest granted to secure certain obligations to William Furr and except for the security interest created by this Security Agreement and except as permitted by the Loan Documents. Debtor has exclusive possession and control of its Equipment and Inventory.
3.3 VALIDITY. This Security Agreement creates a valid security interest in the Secured Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken or shall be taken within three (3) business days.
3.4 CONTINUING INTEREST. Debtor will keep the Secured Collateral free from any adverse lien, security interest or encumbrance and do such other acts or things as Secured Parties may from time to time request to establish and maintain a valid and perfected security interest on the Secured Collateral (free of any adverse lien, security interest or encumbrance) to secure the payment and performance of the Secured Obligations and to permit Secured Parties to exercise all rights and privileges granted to it in this Agreement.
4. EVENTS OF DEFAULT AND REMEDIES.
4.1 EVENTS OF DEFAULT. Any one of the following events shall constitute a default hereunder: (a) failure of Debtor to pay as and when due any of the Secured Obligations; (b) failure of Debtor to perform its obligations under this Security Agreement; (c) if any representation or warranty of Debtor made in this Security Agreement shall prove to be untrue in any material respect; or (d) any other default as set forth in either of the Promissory Notes.
4.2 CERTAIN REMEDIES. If the event of a default the Secured Parties shall have the following rights:
(a) RIGHTS UNDER THE UCC. The Secured Parties may exercise in respect of the Secured Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a Secured Parties on default under the UCC (whether or not the UCC applies to the affected Secured Collateral).
(b) SALE OF SECURED COLLATERAL. Secured Parties may (i) require Debtor to, and Debtor hereby agrees that it will, at its expense and upon request of the Secured Parties forthwith, assemble all or part of the Secured Collateral as directed by the Secured Parties and make it available to the Secured Parties at a place to be designated by the Secured Parties which is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Secured Collateral or any part thereof in one or more parcels at public or private sale, at any Secured Parties's office or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Parties may deem commercially reasonable. Debtor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Secured Parties shall not be obligated to make any sale of the Secured Collateral regardless of notice of sale having been given. The
Secured Parties may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned.
(c) PROCEEDS OF SALE AND DEFICIENCIES. The proceeds received by the Secured Parties in respect of any sale of, collection from, or other realization upon all or any part of the Secured Collateral may, in the discretion of the Secured Parties and after deduction of all costs and expenses of the sale (including reasonably attorneys fees), be held by the Secured Parties as Secured Collateral for, and/or then or at any time thereafter applied in whole or in part against all or any part of the Secured Obligations in such order as the Secured Parties shall elect. Any surplus of such cash or cash proceeds held by the Secured Parties and remaining after payment in full of all the Secured Obligations shall be paid over to Debtor or to whomsoever may be lawfully entitled to receive such surplus. Debtor shall remain liable to Secured Parties for any deficiency.
5. MISCELLANEOUS PROVISIONS
5.1 AMENDMENTS, ETC. No amendment to or waiver of any provision of this Security Agreement, nor consent to any departure by Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed on behalf of the Secured Parties, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
5.2 NOTICES. All notices and other communications hereunder shall be in writing and sent by registered or certified mail, by nationally recognized courier service, by facsimile transmission, or by personal delivery, addressed to Debtor or the Secured Parties at their respective addresses set forth above or at such other address as shall be designated by Debtor or by any Secured Parties in a written notice to Debtor and all Secured Parties at their respective addresses set above or as have been changed from time to time.
5.3 NO WAIVER; REMEDIES. No failure on the part of any Secured Parties to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. The Secured Parties shall exercise any of the rights of the Secured Parties hereunder (including any amendment of this Agreement or waiver of any rights) only as decided by Michael Nouri or a person designated in writing by Michael Nouri. In the event Michael Nouri shall die or be incapacitated without having designated a person to decide whether and how to exercise the rights of the Secured Parties hereunder, a majority of the Secured Parties, without regard to the amount owed to each, shall determine how to exercise the rights of all the Secured Parties hereunder, but any amounts collected shall be shared pro rata based on the amount owed by Debtor to each Secured Party. This Agreement may be amended only upon written consent of (i) Debtor; (ii) Michael Nouri; and (iii) a majority of the Secured Parties without regard to the amount owed to each.
5.4 SEVERABILITY. Wherever possible each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement.
5.5 GOVERNING LAW. This Security Agreement shall be governed by and construed in accordance with internal laws of the State of North Carolina.
5.6 ENTIRE AGREEMENT. This Security Agreement and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral with respect thereto.
IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed and delivered by their duly authorized officer as of the date first above noted.
DEBTOR
SMART ONLINE, INC.
(Corporate Seal)
By: ___________________________
Title: ________________________
ATTEST:
SECURED PARTIES
SCHEDULE A
TO
SECURITY AGREEMENT DATED OCTOBER ___, 2003
---------------------------- ---------------------------------------------------
SECURED PARTY ADDRESS
---------------------------- ---------------------------------------------------
500-201 Market Street
Dennis Michael Nouri Chapel Hill, North Carolina 27516
---------------------------- ---------------------------------------------------
106 Vapata Lane
Henry Nouri Chapel Hill, North Carolina 27514
---------------------------- ---------------------------------------------------
208 Village Crossing Drive
Ronna Loprete Chapel Hill, North Carolina 27517
---------------------------- ---------------------------------------------------
205 Calderon Drive
Thomas Furr Chapel Hill, North Carolina 27516
---------------------------- ---------------------------------------------------
604-204 Copperline Drive
Eric Nouri Chapel Hill, North Carolina 27516
---------------------------- ---------------------------------------------------
|
$358,229.13 Promissory Note dated October 13, 2003 to Dennis Michael Nouri. $83,733.20 Promissory Note dated October 13, 2003 to Dennis Michael Nouri. $346,733.20 Promissory Note dated October 13, 2003 to Henry Nouri. $91,875.00 Promissory Note dated October 13, 2003 to Ronna Loprete. $113,039.78 Promissory Note dated October 13, 2003 to Thomas Furr. $54, 925.00 Promissory Note dated October 13, 2003 to Eric Nouri.
Loan and Settlement Agreement dated October 13, 2003 with Dennis Michael Nouri.
Deferred Compensation Agreement dated October 13, 2003 with Dennis Michael
Nouri.
Deferred Compensation Agreement dated October 13, 2003 with Henry Nouri.
Deferred Compensation Agreement dated October 13, 2003 with Ronna Loprete.
Deferred Compensation Agreement dated October 13, 2003 with Thomas Furr.
Deferred Compensation Agreement dated October 13, 2003 with Eric Nouri.
Employment Agreement dated July 14, 1999 with Dennis Michael Nouri. Employment Agreement dated July 14, 1999 with Henry Nouri. Employment Agreement dated June 29, 1999 with Ronna Loprete. Employment Agreement dated September 15, 2001with Thomas Furr. Employment Agreement dated April 1, 2002 with Eric Nouri.
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$418,749.93 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Dennis Michael Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of four hundred eighteen thousand seven hundred forty-nine dollars and ninety-three cents ($418,749.93), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:___________________________
Title: _______________________
ATTEST:
Lender:
________________________________
Secretary ______________________________
Dennis Michael Nouri
|
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$64,602.90 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Dennis Michael Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of sixty-four thousand six hundred two dollars and ninety cents ($64,602.90), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:___________________________
Title: _______________________
ATTEST:
Lender:
________________________________
Secretary ______________________________
Dennis Michael Nouri
|
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$398,383.27 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Henry Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of three hundred ninety-eight thousand three hundred eighty-three dollars and twenty-seven cents ($398,383.27), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to
be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:___________________________
Title: _______________________
ATTEST: Lender: ________________________________ ______________________________ Secretary Henry Nouri |
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$116,507.60 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Tom Furr, ("LENDER") or order, on or before May 31, 2005, the principal sum of one hundred sixteen thousand five hundred seven dollars and sixty cents ($116,507.60), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to
be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:_____________________________
President
ATTEST: Lender: ________________________________ ________________________________ Secretary Thomas Furr |
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$92,500.00 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Ronna Loprete, ("LENDER") or order, on or before May 31, 2005, the principal sum of ninety-two thousand dollars and no cents ($92,500.00), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to
be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:____________________________
President
ATTEST: Lender: ________________________________ _______________________________ Secretary Ronna Loprete |
SATISFACTION: The debt evidenced by
this Note has been satisfied in full
this ____ day of _____________, 20__.
By: _______________________________
SUCCESSOR PROMISSORY NOTE
TO PROMISSORY NOTE DATED OCTOBER 13, 2003
Durham, North Carolina
$47,740.18 April 30, 2004
FOR VALUE RECEIVED the undersigned, Smart Online, Inc., a Delaware corporation headquartered at 2530 Meridian Parkway, Durham, North Carolina 27713, (the "BORROWER"), promises to pay to Eric Nouri, ("LENDER") or order, on or before May 31, 2005, the principal sum of forty-seven thousand seven hundred forty dollars and eighteen cents ($47,740.18), with interest from the date of this Note, at an annual rate of fifteen percent (15%) per annum compounded annually, on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the above address for Lender or at such place as the legal holder hereof may designate in writing. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. This Note may be prepaid in full or in part at any time without penalty or premium.
If paid in installments, each such installment shall be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal.
In the event: (i) of default when due in payment of any installment of principal or interest hereof and such default is not cured within ten (10) days from the due date; (ii) of default under the terms of any instrument securing this Note , and such default is not cured within fifteen (15) days after written notice to Borrower; (iii) any instrument securing this Note shall cease to be in full force and effect; (iv) Borrower becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due; (v) Borrower applies for a trustee, receiver or other custodian for it or a substantial part of its property; or (vi) any involuntary bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower and not dismissed within thirty (30) days, then upon the occurrence of any of the foregoing events, the holder may, without notice, declare the unpaid principal and interest on this Note, and all other obligations of the Borrower to the holder under this Note and the instruments securing this Note, at once due and payable, whereupon such principal, interest and other obligations shall become at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The principal of this Note and any part thereof, and accrued interest, if any, shall bear interest at the rate of eighteen percent (18%) per annum after default until paid.
All parties to this Note, including makers, principal, and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other
sums due under this Note and the instruments securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the makers, principal and any sureties, guarantors and endorsers of this Note hereby agree to pay to the holder reasonable attorneys' fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and the instruments securing this Notes shall be cumulative and may be pursued singly, successively, or together against the property described in the instruments securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release of such rights or remedies or the right to exercise any of them at another time.
The terms of this Note are the same as the Note from October 13, 2003 except where noted.
This Note is to be governed and construed in accordance with the laws of the State of North Carolina.
This Note is secured by the "Collateral" as set forth in the "Security Agreement" between Lender and Borrower of even date herewith, which shall be is a first lien upon the property therein described.
IN TESTIMONY WHEREOF, the corporate maker has caused this instrument to
be executed by order of its Board of Directors first duly given, the day and year first above written.
Smart Online, Inc.
(Corporate Seal)
By:__________________________
President
ATTEST: Lender: ________________________________ _____________________________ Secretary Eric Nouri |
STANDSTILL AND INTEREST MODIFICATION AGREEMENT
AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and DENNIS MICHAEL NOURI ("Creditor").
This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable.
NOW, THEREFORE, the parties hereby agree as follows:
Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date.
INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004.
This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:
By: /S/ DENNIS MICHAEL NOURI Signature: /S/ DENNIS MICHAEL NOURI
------------------------ ------------------------
Title: CEO Print name: DENNIS MICHAEL NOURI
----------------------- --------------------
|
STANDSTILL AND INTEREST MODIFICATION AGREEMENT
AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and HENRY NOURI ("Creditor").
This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable.
NOW, THEREFORE, the parties hereby agree as follows:
Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date.
INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004.
This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:
By: /S/ DENNIS MICHAEL NOURI Signature: /S/ HENRY NOURI
Title: CEO Print name: HENRY NOURI
----------------------- -----------
|
STANDSTILL AND INTEREST MODIFICATION AGREEMENT
AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and THOMAS FURR ("Creditor").
This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable.
NOW, THEREFORE, the parties hereby agree as follows:
Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date.
INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004.
This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:
By: /S/ DENNIS MICHAEL NOURI Signature: /S/ THOMAS FURR
Title: CEO Print name: THOMAS FURR
----------------------- -----------
|
STANDSTILL AND INTEREST MODIFICATION AGREEMENT
AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and RONNA LOPRETE ("Creditor").
This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable.
NOW, THEREFORE, the parties hereby agree as follows:
Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date.
INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004.
This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:
By: /S/ DENNIS MICHAEL NOURI Signature: /S/ RONNA LOPRETE
Title: CEO Print name: RONNA LOPRETE
----------------------- -------------
|
STANDSTILL AND INTEREST MODIFICATION AGREEMENT
AGREEMENT dated as of December 19, 2003, between Smart Online, Inc., a Delaware corporation (the "Company") and ERIC R. NOURI ("Creditor").
This Standstill Agreement is given to induce holders of Series A Preferred Stock of the Company to approve a reorganization of the capital structure of the Company which will eliminate the Series A Preferred Stock of the Company, it being agreed by Creditor that such reorganization would benefit Creditor who holds shares of Common Stock, and /or options to purchase Common Stock, of the company, by making the Company's Common Stock more valuable.
NOW, THEREFORE, the parties hereby agree as follows:
Effective immediately upon all shares of Series A Preferred Stock of the Corporation ceasing to be issued or outstanding (the "Effective Date") and ending on DECEMBER 31, 2005, Creditor shall refrain from taking any efforts to collect on any amounts owed by the Company to Creditor, including, without limitation, foreclosing on any security interest that secures the obligations of the Company to Creditor. Notwithstanding the foregoing, nothing herein shall prevent Creditor from seeking to collect any salary or other compensation benefits that accrue after the Effective Date.
INTEREST ON THE NOTE WILL BE CHANGED FROM 15% TO 8% EFFECTIVE JUNE 1, 2004.
This Agreement is governed by the laws of the State of North Carolina. This Agreement may be executed in one or more counterparts.
SMART ONLINE, INC. CREDITOR:
By: /S/ DENNIS MICHAEL NOURI Signature: /S/ ERIC R. NOURI
------------------------ -----------------
Title: CEO Print name: ERIC R. NOURI
----------------------- -------------
|
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Smart Online, Inc.
Durham, North Carolina
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on Form SB-2 of our report dated July 21, 2004, except for footnote 13, which is September 10, 2004, relating to the financial statements of Smart Online, Inc., which contains an explanatory paragraph regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the Prospectus.
/s/ BDO Seidman, LLP ----------------------- BDO Seidman, LLP High Point, North Carolina September 29, 2004 |